IMF Working Papers

Industrial Policy and State Ownership: How Do Commercial Banks Allocate Credit in China?

December 23, 2024

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"Industrial Policy and State Ownership: How Do Commercial Banks Allocate Credit in China?", IMF Working Papers 2024, 262 (2024), accessed December 24, 2024, https://doi.org/10.5089/9798400293979.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Using a novel data set with bank-sector-level annual loan data from 137 commercial banks in China from 2004 to 2021 and a quantified industrial policy data set based on text analysis, this paper explores the effects of industrial policy on bank credit provision. While the paper finds no conclusive evidence that commercial banks allocate, on average, more credit to sectors promoted by the central government, it does find heterogenous sensitivities of banks to industrial policy. Rural commercial banks tend to respond most positively to industrial policy compared to other commercial banks. Banks that have lower asset quality, are smaller, have a higher liquidity ratio, and are not listed are more responsive to industrial policy. In addition, sectors dominated by state-owned enterprises (SOEs) benefit more when there is an industrial policy announcement, while policies in SOE-dominated sectors will crowd out credit to other sectors, because SOEs are less risky, both economically and politically. Therefore, banks face a trade-off between political pressure and profitability in response to industrial policy, leading to distortions of financial resource allocation in favor of SOEs.

Subject: Bank credit, Commercial banks, Credit, Financial institutions, Loans, Money

Keywords: Bank credit, Bank Credit, Commercial banks, Credit, Industrial Policy, Loans, State Ownership

Publication Details

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