Page 33 - The South China Business Journal

became better equipped to lend to more productive
firms, gradually reducing loans to less efficient SOEs.
Consequently, new branches experienced a 62.5%
decrease in default rates for private firms. These
improvements weren’t observed for SOE loans,
despite their having received disproportionately
more loans.

Private firms benefit from new access to
credit. The deregulation resulted in a 33.6%
increase in fixed asset growth and an 11.2%
rise in employment for private firms. Their net
income growth and return on assets (ROA)
increased by 91.8% and 21.6%, respectively. SOEs
saw no similar benefits in deregulated cities.
Additionally, private firms' interest rates dropped
by 6.6%, while SOEs' borrowing costs remained
unchanged. The positive effects on private firms Outstanding loans: deregulated cities
were more pronounced in cities with less banking versus regulated cities
competition before the deregulation.

Lending to SOEs curbed the growth potential However, lending to less productive SOEs, which did
of the reform. Researchers estimated that not see these gains, caused a 0.25% GDP loss. The
diverting new loans to unproductive SOEs instead authors conclude that increased credit granted by
of private firms resulted in a loss of GDP growth the deregulation was, in some sense, “lost” due to
potential of the reform. Deregulation led to biased lending towards inefficient SOEs, highlighting
significant growth for private firms in borrower the importance of implementing financial reforms
assets, employment, net income, and ROA, in conjunction with other market reforms, such as
altogether contributing to a 0.97% GDP gain. tightening the soft budget constraints of SOEs.

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