Chinese state-owned commercial banks in reform: inefficient and yet credible and functional?

After the initial public offerings of state-owned commercial banks (SOCBs) in 2005–2010, the transformation of the property structure blurred the conventional boundaries between public and private property in China while the state continued to play an important role in the regulation and operation of this ‘hybrid property’: the mixed public-private ownership structure adopted for previously wholly SOCBs. It is could be that the perceived lending bias against private enterprises was a rational decision made by SOCBs in China, partly due to the high transaction costs of risk evaluation and the lack of any formal channels to mitigate the credit risks of such loans. The hybrid nature of SOCBs property rights makes them a credible and convenient channel for the state to provide counter-cyclical lending to contain any exogenous (economic) shocks that might occur as well as long-term financial support for development purposes in the transitional economy and thus contribute to socio-economic and political stability in China. Instead of a stumbling block for economic reforms in China, as posited by the conventional institutional analysts, the ambiguous property rights of SOCBs and their practice of offering favourable loan conditions to state-owned enterprises could actually contribute to their profitability and thus the continuity of hybrid property banking systems and their credibility in China.