Behind China’s Banking Liberalization: City Commercial Banks and Credit Allocation

Shulong Kang, Prof of Dongbei University of Economics and Finance. Visitor scholar of University of Western Ontario, Tilburg University, Bank of Finland, Bank of Norway and Shinsei Bank. Main research areas are Economics of Banking, Monetary Policy and Social Security.

This paper investigates how government-led banking liberalization affects credit allocation by banks, by exploring the establishment of city commercial banks (CCBs) in China. Based on more than three million corporate financial statements spanning over 16 years, we find that the establishment of CCBs led to falling debt funding for private firms, as well as rising funding costs. At the same time, private infrastructure firms enjoyed increasing debt funding and falling interest costs despite their inferior credit quality. The debt financing of private firm appears most severely affected in municipalities where local governments are major shareholders of CCBs, and officials face high promotional pressures or fiscal constraints.