Chun-Yu Ho (University at Albany, SUNY): Policy distortion in credit market: Evidence from a fiscal stimulus plan

Chun-Yu Ho (University at Albany, SUNY): Policy distortion in credit market: Evidence from a fiscal stimulus plan

Co-authors: Dan Li, Suhua Tian and Xiaodong Zhu

Abstract

This paper examines policy distortion in credit allocation across firms. Our empirical analysis is based on a unique proprietary loan-level dataset covering the period from August 2006 to July 2010 from one of the largest state-owned banks (SOBs) in China. We exploit the policy announcement of a fiscal stimulus plan in November 2008 as an exogenous shock to the bank's loan supply to show that policy intervention results in credit misallocation between state-owned enterprises (SOEs) and private-owned enterprises (POEs) in loan market. Our sample bank induces part of this credit misallocation by loosening credit risk management towards SOEs. As a result, there is a larger reduction in interest rate for SOEs than POEs after the policy announcement. We further show that the credit misallocation is absent when the bank provides funding through discounting bankers' acceptance - a shadow banking activity which faces less government intervention than lending does. Finally, we find SOEs have a lower return on capital (ROC) than POEs, which suggests that there is an adverse real effect of credit misallocation.

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