Resumen de Three essays on banking and finance in China
This thesis investigates how bank regulations and institutional reforms shape bank competition, credit supply, and loan contracts design in the context of Chinese banking market. The first chapter compares the theoretical foundations and empirical performances of commonly applied bank competition measures under China’s binding interest rate regulations. The second chapter investigates if informational monopolies resulting from relationship lending and bank market concentration allow for rent extraction through collateral. The third chapter evaluates the effects of collateral law reform on firms’ access to finance and credit transactions among firms.
Chapter 1: Measuring bank competition under binding interest rate regulation: The case of China.
Many empirical studies suggest that financial reform promoted bank competition in most mature and emerging economies. However, some earlier studies that adopted conventional approaches to measure competition have concluded that bank competition in China declined during the past decade, despite progressive reforms implemented since the 1980s. In this chapter, we show theoretically and empirically that this apparent contradiction is the result of flawed measurement. Conventional indicators such as the Lerner index and Panzar-Rosse H-statistic fail to measure competition in Chinese loan markets properly due to the system of interest rate regulation. By contrast, the Profit Elasticity (PE) approach that was introduced in Boone (2008) as Relative Profit Differences (RPD) does not suffer from these shortcomings. Using balance sheet information for a large sample of banks operating in China during 1996-2008, we show that competition actually increased in the past decade when the PE indicator is used.
Chapter 2: Do banks extract informational rents through collateral? This chapter investigates if informational monopolies resulting from relationship lending and bank market concentration allow for rent extraction through collateral. Our identification strategy hinges on the notion that informational equalization shocks (such as equity IPOs) erode rent seeking opportunities, while competing theories do not rely on information asymmetries among lenders. Using a unique hand-collected database of 9,288 bank loans obtained by 649 listed Chinese firms, we find that collateral incidence is positively associated with relationship intensity and bank market concentration, while this effect is moderated for post-IPO loans. We also demonstrate important cross-sectional variation among borrowing firms: after IPO, rent extraction through collateral is moderated for less risky firms, but intensified for risky firms. These findings are not driven by alternative theories including: shifts in firm risk around IPO; heterogeneous dynamics of risk shifting around IPO; and concurrent lending and corporate bond underwriting. We further demonstrate that our results are not sensitive to: endogeneity of IPO or relationship lending; unobserved time-invariant firm risks; alternative samples; and the endogeneity of loan contract terms. Our study complements the findings in other studies that banks extract rents by charging higher lending rates from their informational monopolies (Hale and Santos, 2009; Schenone, 2009). Furthermore, we provide the first loan-level evidence on the determinants of collateral in Chinese bank lending markets.
Chapter 3: Collateral and the disruption of firms as non-financial intermediaries: Evidence from Chinese Property Law.
This chapter investigates the effects of collateral law reform on access to external finance and trade credit. By allowing large classes of movable assets to be used as collateral, the Chinese Property Law reform transformed firms’ role as non-financial intermediaries. We find after the legal reform, firms relied on trade credit financing substituted to more short-term bank credit, and the providers of trade credit reduced significantly their provision of trade credit. In particular, the Property Law has disrupted the practice in which firms redistribute short-term bank credit via trade credit. Instead, the providers of trade credit started to accumulate more fixed asset investment, which in turn allowed for more long-term borrowing from banks. Our findings are not driven by confounding factors such as liquidity drain due to financial crisis or other contemporary reforms. This study highlights the importance of looking at credit transactions between firms when investigating the effect of collateral laws.
