Did China’s bank ownership reform improve credit allocation?

This paper studies the impact of ownership reform on the credit allocation of China’s three largest state-owned banks (SOBs) in 2004. Using firm data for 2000–2007, we show that listed companies with higher amounts of debt experience a larger decline in credit access in cities that are more exposed to these SOBs after bank reform, indicating that a bank ownership change pushes loan officers to give much more importance to credit risks in the lending process. We extend our study to the universe of unlisted manufacturing companies and find that bank ownership reform also reduces bank lending to state-owned enterprises (SOEs) and low productivity firms in addition to more indebted firms. The negative effect of the reduced SOB lending on firm performance in terms of profitability and investment is only prominent in SOEs and firms with low productivity.