Basis for Bank Credit Allocation in China’s Private Sector: Political Connection or Firm Performance?

Wenli Cheng and Yongzheng Wu

No 41-16, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: We study the roles of political connection and firm performance in bank credit allocation in China’s private sector. Based on data from the 9th Nationwide Survey of Privately Owned Enterprises in China conducted in 2010, we find that: (1) Politically connected firms were more likely to gain access to bank credit, but good firm performance did not seem to have improved firms’ chances of obtaining bank loans; (2) Good performance did help firms get more loans - of the firms that had access to bank credit, those with better performance in the previous year had larger amounts of bank loans; and (3) politically connected firms performed better; and better performance had a small effect of helping the owner establish political connection. These suggest that political connection was used as a signal for credit worthiness that entails not only good performance, but also some other intangible assets unrelated to firm performance (e.g., ability to obtain government bailouts) which would protect the firm from financial ruin.

Keywords: political connection; firm performance; access to bank credit; private firms in China (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2016-11
New Economics Papers: this item is included in nep-cna, nep-eff and nep-tra
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