Banking and Banking Reforms in China in a Model of Costly State Verification
Principal Investigator(s): View help for Principal Investigator(s) Jie Luo; Cheng Wang
Version: View help for Version V4
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Project Citation:
Luo, Jie, and Wang, Cheng. Banking and Banking Reforms in China in a Model of Costly State Verification. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2024-10-24. https://doi.org/10.3886/E209570V4
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Replication package for "Banking and Banking Reforms in China in a Model of Costly State Verification" published at the International Economic Review
Abstract: We present a macro view of China's financial system where a monopolistic banking sector coexists endogenously with bonds and private loans. In equilibrium smaller firms raise finance from private lending, larger firms through bank loans and the largest by issuing bonds. The model predicts that expanding credit supply increases bank loans but reduces bond finance and private lending, in absolute terms and relative to total credit. In addition, removing the interest rate ceiling on bank lending - a recent reform in China - induces larger loans and higher lending rates, lowering the share of bank loans in total credit. Empirical evidence is presented to support these predictions.
Abstract: We present a macro view of China's financial system where a monopolistic banking sector coexists endogenously with bonds and private loans. In equilibrium smaller firms raise finance from private lending, larger firms through bank loans and the largest by issuing bonds. The model predicts that expanding credit supply increases bank loans but reduces bond finance and private lending, in absolute terms and relative to total credit. In addition, removing the interest rate ceiling on bank lending - a recent reform in China - induces larger loans and higher lending rates, lowering the share of bank loans in total credit. Empirical evidence is presented to support these predictions.
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