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SME Relationship Banking and Loan Contracting: Survey-based Evidence from China

Author

Listed:
  • Lu, Shun

    (Nottingham University Business School China, University of Nottingham Ningbo, China)

  • Glushenkova, Marina

    (Nottingham University Business School China, University of Nottingham Ningbo, China)

  • Huang, Wei

    (Nottingham University Business School China, University of Nottingham Ningbo, China,)

  • Matthews, Kent

    (Cardiff Business School)

Abstract

This study explores the impact of relationship banking on the financial constraints and loan conditions of small and medium-sized enterprises (SMEs) in China. Our research contributes to the literature in several ways. First, we examine both the financial costs and loan benefits associated with SME relationship banking, extending the scope of existing literature. Second, our study is unique in its focus on micro-enterprises, rather than large-scale listed companies in China. Lastly, we enhance the quality of the analysis by using direct measures of firms’ spending on bank relationships and their financial constraints, drawn from a recent survey on SMEs in China. Our findings are twofold. On one hand, bank relationship spending significantly reduces financial constraints for SMEs by facilitating access to loans. On the other hand, while this spending enables SMEs to secure more bank credit and longer-term loans, it also results in higher interest rates, increased guarantee requirements, and overall dissatisfaction with loan services. Our research provides new insights into the role of 'guanxi' in China's credit market and its consequences.

Suggested Citation

  • Lu, Shun & Glushenkova, Marina & Huang, Wei & Matthews, Kent, 2024. "SME Relationship Banking and Loan Contracting: Survey-based Evidence from China," Cardiff Economics Working Papers E2023/5, Cardiff University, Cardiff Business School, Economics Section.
    • Handle: RePEc:cdf:wpaper:2024/5
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    References listed on IDEAS

    as
    1. Zou, Yang & Wang, Xiaoming, 2022. "Distance, information and bank lending in China," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    2. Brian Uzzi & Ryon Lancaster, 2003. "Relational Embeddedness and Learning: The Case of Bank Loan Managers and Their Clients," Management Science, INFORMS, vol. 49(4), pages 383-399, April.
    3. Charles J. Hadlock & Joshua R. Pierce, 2010. "New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1909-1940.
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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