Do government banks pamper State-Owned Enterprises?

In 1995, the Chinese government enacted Commercial Bank Act to enforce and regulate commercial banking activities. The government hoped that the initiation of the Act, together with other bank reforms, would promote risk management among commercial banks to allow the banking industry to move toward a market based system. One outcome regulators expected to achieve was that state-owned commercial banks would stop (social) policy lending or directed lending to state-owned enterprises (SOEs hereafter). This paper empirically examines lending by a bank around the enforcement of the Act. After the Act, the bank puts in place strict screening criteria including size of the borrowing firm, collateral status, loan duration, the length of relationship with the bank, and the credit rating of the firm. The bank also charges SOEs higher rates of interest than private firms by 5 basis points recognizing that such loans are more risky. In sum, the findings show that Chinese SOEs lost their access to cheap money from the bank after 1995. I would like to express my gratitude to Takeshi Yamada for his supervision and encouragement. I wish to acknowledge helpful suggestions and comments of Jun Koo Kang, Inmoo Lee, and Hassan Naqvi. I thank an anonymous bank for providing me data. I also thank bank officials in that bank for helpful discussions and Wang Juan for correcting my English. 1 Do government banks pamper State-Owned Enterprises