Publication Date

5-1-2008

Advisor(s)

Imai, Masami

Major

Mathematics-Economics Program

Language

English

Abstract

The empirical literature on China's banking sector shows a prevalence of connected lending practices that favor unviable state-owned enterprises (SOEs) while discriminating against productive private enterprises. This paper extends the data to 2005 to investigate whether the integrity of lending policy has improved during recent periods when the government of China allegedly made a significant stride in reforming its banking sector as it prepared for WTO compliance. The paper finds that the response of bank loans to economic fundamentals remains persistently weak (or even strongly negative) while unprofitable SOEs continue to attract bank loans. We also find evidence that suggests the interbank market is highly fragmented, so banks are still limited in lending by their collections of household deposits. These pieces of evidence cast some doubt on the efficacy of recent banking reform.

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