Local Financial Development and constraints on private firms' exports: EvACidence from City Commercial Banks in China

We provide evidence that the development of city commercial banks (CCBs) across China has alleviated the restraining effect of China's domestic financial market inefficiency on the export activity of domestic private firms. Looking at the export behavior of 260 cities between 1997 and 2012 we confirm the well-established under-performance of domestic private firms in financially more vulnerable sectors compared to foreign affiliates in China. We show that a larger number of city commercial banks' branches raises domestic private firms' export disproportionately more in financially dependent sectors, so as to reduce the systematic disadvantage of domestic private firms over foreign-owned firms in export markets related to their greater financial exclusion. We however find that the private firms export performance has deteriorated relative to that of state-owned firms casting doubt on the capacity of development of CCBs to put an end to the systematic bias of lending in favor of the state sector.