Page 32 - The South China Business Journal

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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