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

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  • Wenli Cheng
  • Yongzheng Wu

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.

Suggested Citation

  • Wenli Cheng & Yongzheng Wu, 2016. "Basis for Bank Credit Allocation in China’s Private Sector: Political Connection or Firm Performance?," Monash Economics Working Papers 41-16, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:2016-41
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    political connection; firm performance; access to bank credit; private firms in China;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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