Rise of Bank Competition: Evidence from Banking Deregulation in China

Using comprehensive loan-level data in China, we investigate how the deregulation on bank entry barriers alters local banking industrial organisation and its economic consequences. We document a novel trade-off: the potential benefits of deregulation are adversely mitigated by entrant banks’ preferences for lending to SOEs over more productive private firms. This credit misallocation accounts for 0.25% of GDP losses and is mainly due to SOEs’ soft budget constraints. Private firms need to provide more guarantees and higher ratings to borrow from entrant banks but enjoy lower interest rates. Access to these loans increases private firms’ investment, employment, profit, and ROA.

Keywords: Banking Deregulation, Credit Misallocation, Big Data, Growth

JEL Classification: G21, G28, L50, O40

Suggested Citation: Suggested Citation

Gao, Haoyu and Hong, Ru and Townsend, Robert M. and Yang, Xiaoguang, Rise of Bank Competition: Evidence from Banking Deregulation in China (November 2021). HKIMR Working Paper No.27/2021, Available at SSRN: https://ssrn.com/abstract=3970528 or http://dx.doi.org/10.2139/ssrn.3970528

Haoyu Gao

Renmin University of China ( email )

Mingde main building
Haidian district, No. 59,
Beijing, Beijing 100872
China

Ru Hong

Nanyang Technological University (NTU) - School of Biological Sciences ( email )

Singapore

Robert M. Townsend (Contact Author)

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Xiaoguang Yang

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Science ( email )

Beijing
China

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Rise of Bank Competition: Evidence from Banking Deregulation in China