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Banking And Banking Reforms In China In A Model Of Costly State Verification

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  • Jie Luo
  • Cheng Wang

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.

Suggested Citation

  • Jie Luo & Cheng Wang, 2025. "Banking And Banking Reforms In China In A Model Of Costly State Verification," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 66(2), pages 849-882, May.
    • Handle: RePEc:wly:iecrev:v:66:y:2025:i:2:p:849-882
    DOI: 10.1111/iere.12744
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