Bank discrimination in transition economies-ideolo

JournalofComparativeEconomics31(2003)387–413:ideology,information,orincentives?LorenBrandta,∗andHongbinLibaUniversityofToronto,150St.GeorgeSt.,Toronto,ONM5S3G7,CanadabTheChineseUniversityofHongKong,Shatin,HongKong,ChinaReceived5June2002;revised29May2003Brandt,Loren,andLi,Hongbin—Bankdiscriminationintransitioneconomies:ideology,information,orincentives?Thispaperanalyzesbankdiscriminationagainstprivatefirmsinatransitioncountry.Theoretically,weshowthatbanksmaydiscriminatefornon-profitreason,butthatthisdiscriminationdiminisheswiththeincentivesandhumancapitalofbankmanagers.Employingmatchingbank–firmdatafromChina,weexamineempiricallytheextent,sourcesandconsequencesofdiscrimination.Thesurveydesignallowsustodisentanglesampletruncation,omittedvariablebias,andendogeneityissues.Ourempiricalfindingsconfirmthetheoreticalpredictions,andalsoindicatethat,asaresultofdiscrimination,privatefirmsresorttomoreexpensivetradecredits.JournalofComparativeEconomics31(3)(2003)387–413.UniversityofToronto,150St.GeorgeSt.,Toronto,ONM5S3G7,Canada;TheChineseUniversityofHongKong,Shatin,HongKong,China.2003AssociationforComparativeEconomicStudies.PublishedbyElsevierInc.Allrightsreserved.JELclassification:D80;G21;P31;P341.IntroductionThebankingsectorplaysacrucialroleineconomictransition.Bankbehaviordeterminesthehardnessofthebudgetconstraintsfacingenterprises,andthus,influencesfirmincentives.Banksalsoplayanimportantroleintheintermediationofsavingsandintheallocationofcredittoexistingandespeciallynewlyestablishedfirms.Becauseoftheselinksandthebankingsystems’potentialeffectsontherealsector,someobservers*Correspondingauthor.E-mailaddresses:[e-mail](L.Brandt),[e-mail](H.Li).0147-5967/$–seefrontmatter2003AssociationforComparativeEconomicStudies.PublishedbyElsevierInc.Allrightsreserved.doi:10.1016/S0147-5967(03)00080-5388L.Brandt,H.Li/JournalofComparativeEconomics31(2003)387–413argueforenterpriserestructuring,privatization,andbankingreformtobeimplementedsimultaneously(Brainard,1991).Sincetheearly1990s,theprivatesectorhasbeenthemostdynamicsectoroftheChineseeconomy.Between1990and2000,theaverageannualgrowthrateofoutputinthissectorwasalmost60percent(ChinaStatisticalYearbook,variousyears;ZhangandMing,2001).1ThissectorincludesnotonlydenovoprivatefirmsbutalsomanyStateOwnedEnterprises(SOEs),andespeciallyTownshipandVillageEnterprises(TVEs),thatwereprivatizedsince1993(Brandtetal.,2003;Caoetal.,1999;LiandRozelle,2003).2Bytheendof2000,theprivatesectorwasproducingmorethanone-thirdofChina’sindustrialoutput.Althoughtheprivatesectorisgrowingrapidly,borrowingfromChina’sstate-ownedcommercialbankingsectorbyprivatefirmsremainsmeager.3AccordingtoarecentWorldBank(2000)Report,inthelate1990s,theprivatesectorreceivedlessthanonepercentofthetotallendingofChina’scommercialbanks.4Mostinvestmentandworkingcapitalarefinancedthroughretainedearnings,informalnetworks,andinter-firmcredit(Lardy,1999;ZhangandMing,2001).Thesharpcontrastbetweenprivatesectorgrowthandtheloansthesectorreceivesfromthebankingsystemraisesafundamentalquestion.Areprivatefirmsbeingdiscriminatedagainstintheformalfinancialmarkets?Thispaperinvestigatesbankdiscriminationagainstprivatefirmsbydrawingonamatchingbank–firmdatasetcollectedbytheauthorsinruralChinain1998.5BankbehaviorinChinatowardsprivatefirmshasimportantimplicationsfortheongoingprivatizationprocess,andmoregenerally,economicgrowth(BrandtandZhu,2000,2002).Discriminationagainstprivatefirmsmaycomefromanumberofsources.Theprimarysourceofdiscriminationistastes(Arrow,1998;Becker,1957;Yinger,1998).Becker(1993)assertsthatdiscriminationinthemarketplaceconsistsofvoluntarilyrelinquishingprofits,wagesorincometocatertoprejudice.Banksmaydiscriminateagainstacertaingroupbecausetheydisliketheapplicantsforculturalorhistoricalreasons.InChina,banksarestate-ownedsothattheymayhaveapurelyideologicalpreferenceforlendingtogovernment-ownedfirmsoverprivatefirms.Lendingtogovernment-ownedfirmsmayalsogenerateperkstobanksthattheydonotreceivewhenlendingtoprivatefirms.Moregenerally,banksmaybewillingtosacrificeprofitsinordertoseekpolitical,ideologicalorpersonalgoalsratherthantheprofits.ThelackofcompetitioninChina’sbankingsystemhelpstosustainsuchbehavior.Therearethreeotherreasonswhyprivatefirmsmayfacedifficultyinaccessingcreditfromtheformalsector.Ineachcase,differentiallendingpracticescanbe1Thesenumbersareslightlymisleadingbecauseoftheverylowbasefromwhichtheyarecalculated;however,privatefirmsdidgrowrapidlyoverthisperiod.2Inthe1980s,theTVEsectorwasthemostrapidlygrowingsegmentoftheeconomy.3China’sbankingsectorisdominatedbyfourstate-ownedbanks,namely,theBankofChina,IndustrialandCommercialBankofChina,ConstructionBankofChina,andtheAgriculturalBankofChina.RuralareasarealsoservedbytheRuralCreditCooperatives,whiletheUrbanCommercialBanks,formerly,theUrbanCreditCooperatives,alsoserviceurbanareas.4Thesefiguresmayunderestimatethelendingtotheprivatesector;however,stateandcollectively-ownedfirmsarereceivingadisproportionateshareofthecredit.5Toourbe