Abstract
For commercial banks, it is also risky to make loans to SOEs. But once such loans turn sour, the government will usually mediate and seek “excuses” in order to extricate the debtors. This is one of the most important reasons why state-owned commercial banks continue to make loans to SOEs even when they hold large losses. On the contrary, it is very difficult for NSOEs, especially NGEs, to obtain loans from state-owned commercial banks. It is all the more so when China’s commercial banking system is still strongly informed by the planned economy. This phenomenon is summarized as “ownership discrimination” in academia. In December of 1993, the State Council announced the Decision on Reform of the Financial System and proposed to turn the state-owned specialized banks into real commercial banks. After nearly 20 years of reformation, the former state-owned banks have largely given up the function of policy banks; like ordinary enterprises, their primary goal is the pursuit of profit. That being the case, the ownership of enterprises should have been no longer important when banks offer loans. In fact, however, they are still reluctant to lend money to most NGEs. Their attitude toward NGEs has not changed after the banking reform, but the reasons are fundamentally different. Should we still attribute NGEs’ difficulty in getting loans to the concept of “ownership discrimination,” it would not beat all persuasive.
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Notes
- 1.
When SOEs run into financial troubles, their usual recourse would be to argue their case to the government, the thrust of which is that their survival concerns the livelihood of many employees and if they go bankrupt, personnel placement would become a sensitive issue of public concern. Therefore, they would ask the government for help. To save such enterprises, the government will usually mediate on their behalf with the banks, who will offer loans to these enterprises, namely the so-called “loans for stability and unity.”
- 2.
According to Fan Gang, the current banking system of China is dominated by state-owned banks. They are unwilling to offer loans to SMEs, most of which are non-public enterprises, as they are afraid to take responsibility for possible loss of state-owned assets. Brandit and Li discovered through an analysis of the Chinese data that NGEs have more difficulty getting bank loans and are usually required to have higher guarantee conditions even if they succeed in getting loans (which are usually very small amounts). This verifies the ownership discrimination in China’s state-owned banks.
- 3.
La Porta, R., Lopez-de-silanes, F., Shleifer, A. (2002). Government Ownership of Banks. Journal of Finance, LVII (1),265–302.
- 4.
Bonin, J. P., Hasan, I., Wachtel, Paul. (2003). Bank Privatization and Performance: Evidence from Transition Countries. Presented at World Bank Conference on Bank Privatization, 20–21.
- 5.
Dong Fureng. (Nov. 5, 2002). China Business Times.
- 6.
For example, China Minsheng Bank was established after many years of public appeals. Academia had expected it to kick off the privatization of China’s banking industry and therefore settle SMEs’ difficulties in getting loans. Minsheng has disappointed the scholars, however. In SME lending, it has even been doing worse than the state-owned Agricultural Bank; in capital scale, it has actually gone beyond the scope of small- and medium-sized private banks; in business models, it is approximating the four major state-owned banks; and in target clients, it has already been assimilated by the state-owned banks.
- 7.
Berger, A., Miller, Nathan., Petersen, Mitchell., Rajan, Raghuram., Stein, Jeremy. (2002). Does Function Follow Organizational Form? Evidence from the Lending Practices of Large and Small Banks. NBER Working Paper No. 8752, February.
- 8.
Berger, Allen N., Klapper, Leora F., Udell, Gregory F. (2001). The Ability of Banks to Lend to Informationally Opaque Small Business. Journal of Banking and Finance 25, 2127–2167.
- 9.
Strahan, Philip E., & Weston, James P. (1998). Small Business Lending and the Changing Structure of the Banking Industry. Journal of Banking and Finance, 22, 821–845.
- 10.
Harhoff, D., & Köting, T. (1998). Lending Relationships in Germany: Empirical Evidence from Survey Data. Journal of Banking and Finance, 22, 1317–1353.
- 11.
Berger, A. N., & Udell, G. F. (1998). The Economics of Small Business Finance: The Role of Private Equity and Debt Market in the Financial Growth Cycle. Journal of Banking and Finance 22, 613–673.
- 12.
Petersen, M., & Rajan, R. (1995). The Effect of Credit Market Competition on Lending Relationships. Quarterly Journal of Economics, 110, 407–443.
- 13.
Harhoff, D., & Köting, T. (1998). Lending Relationships in Germany: Empirical Evidence from Survey Data. Journal of Banking and Finance 22, 1317–1353.
- 14.
Scott, J., & Dunkelberg, W. (1999). Bank Consolidation and Small Business Lending: a Small Firm Perspective. In R. Lang (Ed.), Business Access to Capital and Credit, 328–361.
- 15.
Xu Dianqing. (2001). 200 Questions on Non-Governmental Banks. Beijing: Peking University Press, p. 3.
- 16.
Ying Yixun. (June 3, 2005). SMEs Loan Practice of Tailong Urban Credit Cooperative in Taizhou City. Southern Weekly.
- 17.
Ba Shusong. (2002). The Active Community Financing in the U.S. Finance & Trade, (9), 132–133. Liu Wei., & Zhu Yushun. (2004). On Development of China’s Rural Credit Cooperatives in Light of Community Banks in U.S. Rural Finance Forum, (3), 63–65. Wang Aijian. (2006). Development Models of China’s Community Banks. Beijing: China Financial Publishing House, pp. 3–7.
- 18.
Hauswald, R., & Marquez, R. (2000). Relationship Banking, Loan Specialization and Competition. Indiana University Working Paper.
- 19.
In our field investigation, we have found that some small loan companies and pawn guilds privately absorb large deposits from some special groups, which may not be called deposits but financial products, instead. For example, some people, owing to their special status, have high and stable incomes, or plenty of high-quality assets, so they can receive a larger amount of credit loans from the state-owned banks in accordance with the legal interest rate. Afterwards, they can give the money to small loan companies or pawnshops for financial management, which promises them a far higher interest income than that of bank loans.
- 20.
For example, in 2009, Baoruitong Pawn Shop made over 30,000 deals and loans of over RMB 3 billion, with more than 90% of its borrowers being SME owners or individual operators.
- 21.
The American National Banking Act issued in 1864 stipulated that banks should operate only within a certain administrative region, and restrictions on banks’ inter-state operations officially became a federal law in 1927 in the form of McFadden-Pepper Act. The inter-state business regulation has limited the expansion of big banks and objectively provided legal support for the development of community banks. The Community Reinvestment Act released in 1977 in the United States requires that financial regulatory authorities regularly assess whether financial institutions within their jurisdiction meet the financial needs of local communities, and publish on a regular basis the contributions of financial institutions to their communities. The evaluation results will become an important factor to be considered by the government when a financial institution applies for new deposit branches or new forms of business.
- 22.
Under the pressure of competition and the influence of relevant policies, there is currently a tendency among small- and medium-sized banks in China to blindly “make it bigger.” Regional joint-stock banks of small and medium sizes are competing against each other in their attempt to be listed on the stock market and developing themselves into large national banks.
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Wang, H. (2017). Community Banks and SME Financing: The Financing Environment of NGEs’ Growth and Development. In: Liu, Y. (eds) New Interpretations on the Development of China’s Non-Governmental Enterprises . Research Series on the Chinese Dream and China’s Development Path. Springer, Singapore. https://doi.org/10.1007/978-981-10-3872-3_10
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