The Loan Herding of Chinese Banks for Industrial Lending and the Subsequent Economic Impact

Abstract

By using a uniquely compiled dataset, this study first examines whether Chinese banks exhibit the inter-temporal loan herding in industrial lending during 2006-2011. We decompose the inter-temporal correlation in lending into the own following and other following. Our results find that the correlation in lending for joint-equity banks and city banks primarily result from their loan herding. Next, we clarify the reasons that affect and cause loan herding. Our results show that loan herding significantly occurs in banks with a higher proportion of risky assets, a higher proportion of non-performing loans, a lower capitalization and a lower ROE. The two motivations for loan herding include reputational herding and characteristic herding. Finally, we aggregately analyze whether and how the loan herding of the same type and different types affect the multiple dimensions in real economy. We find that loan herding cause bank lending to risky industrial firms, which leads to the significant harmful impacts on real economic activities such as the industrial GDP growth, stock prices, price-earnings ratios, bank non-performing loans and foreign direct investment in the following year.

Keywords: China, loan herding, characteristic herding, reputational herding, economic impact.

JEL Classification: C21, D03, G02, G21