Bank deregulation, environmental regulation and pollution reduction: evidence from Chinese firms

The Chinese government has increased its emphasis on ‘green GDP’ and restricted bank lending to polluting firms. However, government interference may distort bank credit allocation and worsen the external financing environment of polluting firms. Bank competition as a market-based mechanism may play a role in pollution abatement. By matching the Annual Surveys of Industrial Firms dataset with the Ministry of Environmental Protection survey data and the city-level bank competition data, this article explores the effects of banking sector structure on firm-level pollution emissions under the context of bank deregulation. The findings of this study are mainly in four aspects. First, more bank competition can reduce pollution emissions per unit output value. Second, bank competition affects enterprise pollution emissions through alleviating financial constraints. To be more specific, credit availability, credit amount as well as credit cost are the channels for bank competition to affect enterprise pollution emissions. Third, strict environment regulation strengthens the negative effect of bank competition on pollution emissions. Fourth, the mandatory administrative means of impeding banks from lending to polluters did not achieve the aim of pollution reduction. This study provides evidence that the financial system of banks can have a material impact on firms’ pollution emissions.