Page 32 - The South China Business Journal
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c   OMMUNITY NEWS



                                  China’s Ban ng



                    Deregulation: Impacts on



                    Competition and Growth




                                           By the Stanford Center on China’s Economy and Institutions (SCCEI)


                                                               Committee’s (CBRC) registry system, containing
             •   In 2009, China allowed small, privately owned joint   over 7 million loan contracts from the 19 largest
             equity banks to expand to increase competition with   banks in China between 2006 and 2013, comprising
             state-owned banks and boost growth.               80% of China’s bank loan market in that period.
                                                               Additional CBRC data detailed over 200,000 branches
             •   These banks initially favored lending to      of approximately 2,800 banks from 1949 to 2016.
             state-owned enterprises (SOEs) seen as less       The final dataset from the Chinese Industry Census
             risky due to their soft budget constraints.       included detailed information on investment,
                                                               employment, performance, and profitability trends
             •   Over time, improved lending practices at new   for all of China’s major firms.
             banks reduced private default rates by 62.5%.
             Default rates among SOE borrowers did not improve.    After deregulation, joint equity banks
                                                               proliferate. Deregulation removed restrictions on
                                                               branch openings, causing the number of joint equity
             •   The deregulation reduced interest rates       bank branches in deregulated cities to increase by
             by 6.6% for private firms (but not SOEs) and      8.6% within two years. Prior to the deregulation, joint
             caused private firms to boost investment          equity banks operated in only 9.5% of Chinese cities.
             (33.6%), employment (11.2%), revenue (91.8%)      However, just one year after the deregulation, they
             and return on assets (21.6%). SOE borrowers did   expanded to 15.7% of Chinese cities. Granted with
             not experience these gains.                       more access to new markets, their market share rose
                                                               from 24.5% in 2008 to 33.5% in 2010. Meanwhile,
                                                               the incumbent big five banks showed minimal
             •   The deregulation’s effects on private firm    expansion and little change in their lending practices
             growth added an estimated 0.97% to annual         in deregulated cities.
             GDP, but increased credit to inefficient SOEs led
             to estimated GDP losses of 0.25%.                 New bank branches primarily lend to state-
                                                               owned enterprises (SOEs), but this bias
                 efore China’s 2009 partial banking deregulation,   diminishes over time. In the first year following
             Bfive state-owned banks dominated China’s         deregulation, new joint equity banks increased their
             banking system with branches covering 85% of the   total lending to SOEs by 39.3% in deregulated cities,
             country, while joint equity banks — smaller, private   and their lending share to SOEs grew by 18.6%. In
             institutions serving local markets — had branches   contrast, the incumbent big five banks did not alter
             covering only 9%, due to strict regulations. In 2009,   their lending habits to SOEs. The authors conclude
             China eased these controls to promote economic    that the initial tendency of joint equity banks to
             growth through increased financial competition,   favor SOEs arises from a lack of information about
             allowing joint equity banks to open new branches and   the creditworthiness of private firms in deregulated
             extend loans to enterprises previously overlooked   cities. Consequently, they prefer lending to SOEs that
             by the state banks. What were the impacts on the   enjoy implicit financial backing from the government,
             banking sector and economic growth?               despite SOEs’ lower average efficiency. However, this
                                                               biased trend persists for only two years.
             The data. The 2009 reform targeted specific
             regions in China based on the pre-deregulation    Over time, new banks obtained more soft
             distribution of bank branches. Researchers        information to better predict creditworthiness
             compared cities unaffected by the reform to those   of private firms. Following deregulation, banks’
             impacted, analyzing how new joint equity banks    ability to assess firms improved over time. Two years
             competed with the big five banks, how these banks   after opening a new branch, joint equity banks could
             responded, and how firms reacted. The study       identify 22.6% of potential loan failures, increasing                                                                                          :
             used data from the China Banking Regulatory       to 42.3% by the third year. Eventually, these banks                                                                                              :
                                                                                                                                                                                                                 :


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