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Refinancing and decentralization: Evidence from China

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  • Park, Albert
  • Shen, Minggao

Abstract

Decentralization can complement market liberalization by strengthening incentives of agents to respond to market signals. However, in China banks centralized lending authority following financial reforms in the mid-1990s. We present a new theory of financial decentralization in which centralization provides a credible commitment not to refinance bad projects by reducing available information. Using data from Chinese rural financial institutions, we empirically assess the determinants of decentralization and the likelihood of collateral seizure, strongly confirming the predictions of the refinancing model. We conclude that weak institutional environments may limit the efficiency of financial intermediation despite financial market liberalization.

Suggested Citation

  • Park, Albert & Shen, Minggao, 2008. "Refinancing and decentralization: Evidence from China," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 703-730, June.
    • Handle: RePEc:eee:jeborg:v:66:y:2008:i:3-4:p:703-730
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    Cited by:

    1. Fangzheng Zhu & Yuexiang Lu, 2022. "Carbon Emission Reduction Effect of China’s Financial Decentralization," Sustainability, MDPI, vol. 14(22), pages 1-22, November.
    2. Lopomo Beteto Wegner, Danilo, 2024. "Centralized and decentralized lending: Implications of consolidation in the German banking industry," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 1051-1063.
    3. Silvia Dominguez-Martinez & Randolph Sloof & Ferdinand von Siemens, 2010. "Monitoring your Friends, not your Foes: Strategic Ignorance and the Delegation of Real Authority," CESifo Working Paper Series 3172, CESifo.
    4. Jing Ma & Qiuyun Zhao & Qing Li & Hao Yang, 2021. "Financial Constraints, Corporate Savings and Labor Income Share—Based on China’s Economic Transition," Sustainability, MDPI, vol. 14(1), pages 1-32, December.
    5. Andrii Hrona, 2020. "Foreign Currency Refinancing As A New Element Of Stimulating The Economic Development Of Transition Economies," Baltic Journal of Economic Studies, Publishing house "Baltija Publishing", vol. 6(5).
    6. Qian, Meijun & Huang, Yasheng, 2016. "Political institutions, entrenchments, and the sustainability of economic development – A lesson from rural finance," China Economic Review, Elsevier, vol. 40(C), pages 152-178.
    7. Ghazi Zouari, 2011. "Specific knowledge, investment decision and organizational architecture," Working Papers CREGO 1110501, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.

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