Between Mao and markets: new evidence on segmentation of the bank loan market in China

  • Published on
    14-Apr-2017

  • View
    212

  • Download
    0

Transcript

  • This article was downloaded by: [Chinese University of Hong Kong]On: 20 December 2014, At: 21:23Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UK

    Applied Economics LettersPublication details, including instructions for authors and subscription information:http://www.tandfonline.com/loi/rael20

    Between Mao and markets: new evidence onsegmentation of the bank loan market in ChinaMasanori Ohkuma aa Faculty of Education and Integrated Arts and Sciences , Waseda University , 1-6-1 Nishi-Waseda, Shinjuku-ku, Tokyo, 169-8050, JapanPublished online: 05 Aug 2009.

    To cite this article: Masanori Ohkuma (2010) Between Mao and markets: new evidence on segmentation of the bank loanmarket in China, Applied Economics Letters, 17:12, 1213-1218, DOI: 10.1080/00036840902845426

    To link to this article: http://dx.doi.org/10.1080/00036840902845426

    PLEASE SCROLL DOWN FOR ARTICLE

    Taylor & Francis makes every effort to ensure the accuracy of all the information (the Content) containedin the publications on our platform. However, Taylor & Francis, our agents, and our licensors make norepresentations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of theContent. Any opinions and views expressed in this publication are the opinions and views of the authors, andare not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon andshould be independently verified with primary sources of information. Taylor and Francis shall not be liable forany losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoeveror howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use ofthe Content.

    This article may be used for research, teaching, and private study purposes. Any substantial or systematicreproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in anyform to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms-and-conditions

    http://www.tandfonline.com/loi/rael20http://www.tandfonline.com/action/showCitFormats?doi=10.1080/00036840902845426http://dx.doi.org/10.1080/00036840902845426http://www.tandfonline.com/page/terms-and-conditionshttp://www.tandfonline.com/page/terms-and-conditions

  • Applied Economics Letters, 2010, 17, 12131218

    Between Mao and markets: new

    evidence on segmentation of the

    bank loan market in China

    Masanori Ohkuma

    Faculty of Education and Integrated Arts and Sciences, Waseda University,

    1-6-1 Nishi-Waseda, Shinjuku-ku, Tokyo 169-8050, Japan

    E-mail: ohkuma@aoni.waseda.jp

    This article examines the local bank lendings dependency upon local

    deposits within China in the FeldsteinHorioka vein. In the case of

    a transition economy like China, it would be appropriate to assume the

    presence of a significant level of disparity in the cost of funds between

    State-Owned Enterprises (SOEs) and non-SOEs. For this purpose,

    a dataset of the provincial deposit rates and the provincial loan rates for

    the state and the nonstate sectors is built. Even after controlling the

    national- and province-specific shocks, the correlation between the local

    deposit rates and the local loan rates for the nonstate sector, in contrast

    with that for the state sector, is even higher than for the Organization for

    Economic Co-operation and Development (OECD) member countries.

    The findings suggest that serious asymmetric information problems

    between banks and non-SOEs might impede cross-regional lending and

    prevent the development of the nonstate sector within China.

    I. Introduction

    China has maintained a remarkable growth rate sincethe outset of the reform programme in the early1980s. One of the probable engines of Chinaseconomic growth is its financial sector. Since the1990s, there has been a growing consensus in theliterature that Schumpeter might be right (King andLevine, 1993). That is, development of the financialsector promotes economic growth, for instance, byreducing the disparity between the costs of internaland external funds (Rajan and Zingales, 1998), andpromoting the responsiveness to shocks towardsgrowth opportunities (Fisman and Love, 2004).Since the current Chinese financial system is domi-nated by a large banking sector and the role of the

    stock market in allocating financial resources in theeconomy has been limited,1 the features of theChinese banking system have attracted much atten-tion in recent years to gain an insight into itseconomic growth pattern.

    From among a series of inter-related questions thatneed to be addressed, I focus on the followingquestion: how much are Chinese intra-nationalbank loan markets integrated? Surprisingly, however,very few formal investigations have been conductedon domestic capital mobility within China. By way ofexception, Boyreau-Debray and Wei (2004) (hence-forth, BW) explore the segmentation of Chinesedomestic capital markets by applying the modifiedversion of the FeldsteinHorioka test (Feldstein andHorioka, 1980; henceforth, FH), the standard

    1 See, for instance, Allen et al. (2008).

    Applied Economics Letters ISSN 13504851 print/ISSN 14664291 online 2010 Taylor & Francis 1213http://www.informaworld.com

    DOI: 10.1080/00036840902845426

    Dow

    nloa

    ded

    by [

    Chi

    nese

    Uni

    vers

    ity o

    f H

    ong

    Kon

    g] a

    t 21:

    23 2

    0 D

    ecem

    ber

    2014

    mailto:ohkuma@aoni.waseda.jphttp://www.informaworld.com

  • approach used in literature on international finance.They argue that, under perfect capital mobility, thereexists no necessary association between nationalsaving and investment, since financial resourcescan globally seek out the highest expected returns.A substantial amount of literature on this subjecthas expressed skepticism about the FH approach as amethod of measuring international capital mobilityfor various reasons (see for instance, Coakley et al.,1998). Despite this, the FH test has been regarded asa reasonable approach to measure intra-nationalcapital mobility (e.g. Yamori, 1995; BW, 2004).

    An important drawback of BW (2004) is that it hasnot paid adequate attention to Chinas peculiaritiesas a transition economy.2 In a transition economylike China, it would be appropriate to assume thepresence of a significant level of disparity in the costof funds between State-Owned Enterprises (SOEs)and non-SOEs. If this is true, Chinese domesticcapital markets would be segmented, not only on thebasis of geographical units, but also the ownershipform of the borrowers. Unfortunately, however, thereis no satisfactory data available on loans decomposedon the basis of the borrowers ownership form,consistently published by Chinas national authori-ties. It is this lack of data that has preventedresearchers from directly testing the above-mentionedhypothesis.

    The aim of this article is straightforward. I measurethe degree of domestic capital mobility within thebanking system, both in the state and the nonstatesector in China. For this purpose, I develop a pro-vincial-level panel data for deposits and loansdecomposed on the basis of the borrowers ownershipform using the method developed by Zhang et al.(2007), and apply a modified version of the FH test tothe data.

    II. Data and Methodology

    The data set used in this article covers 31 Chineseprovinces (or province-level autonomous regions orsuper-cities) on the mainland during 19992005. Thesources of data are the China Statistical Yearbook(National Bureau of Statistics of China, variousyears), the China Economic Census Yearbook-2004(The State Council of China, 2006) and the ChinaFinancial Statistics (19492005) (Beijing: Zhongguojinrong chubanshe, 2007).

    As mentioned above, since the panel data on banklending decomposed on the basis of the borrowersownership form are not published by Chinasnational authorities on a consistent basis, Iconstruct this data using the method developed byZhang et al. (2007). Following them, considerEquation 1

    Loan=LocalGDPi,t 01SOEOutput=theTotali,t2SOEOutput=the Totali,tCoastDummyiX

    i

    iProvinceDummyii,t

    i,t i,t12i,t jj51 1

    where the dependent variable is the total loan asa share of the provincial Gross Domestic Product(GDP) for province i at time t, the independentvariables are the industrial output share of SOEs andits interaction term with a dummy variable for theprovinces located in the coastal region (that equalsone if the province is located in the coastal region,and zero otherwise),3 province-specific effects, and i,tis the disturbance term. Furthermore, I specify a firstorder autoregressive process, AR(1), to correct forserial correlation in the disturbance term.

    If bank loans are allocated to the state and thenonstate sectors depending on their output share ofthe total, then 1(SOE Output/the Total) or1 2(SOE Output/the Total) would capture theamount of loans to the state sector as a share of theprovincial GDP. Note that the total bankloans should be classified into two components, thatis, that issued to the state sector and the rest issuedto the others. Then the outstanding amount ofloans to the nonstate sector (as a share of provincialGDP) can be obtained by deducting the valuesyielded by the estimated amount of loans to thestate sector (as a share of the provincial GDP)from the total amount of loans (as a share of theprovincial GDP).

    Table 1 reports the estimation results. The esti-mated signs of the output share of SOE are positiveand significant at the 1 and 5% levels (row 1).

    III. Empirical Tests

    Table 2 reports the results. The averaged correlationbetween the deposit rates and the loan rates for the

    2 Payne and Mohammadi (2006) examine the association between saving and investment among transition economies.3 Following the literature, the coastal region in this study includes Beijing, Tianjin, Hebei, Liaoning, Shangdong, Shanghai,Jiangsu, Zhejiang, Fujian, Guangdong, Hainan and Guangxi.

    1214 M. Ohkuma

    Dow

    nloa

    ded

    by [

    Chi

    nese

    Uni

    vers

    ity o

    f H

    ong

    Kon

    g] a

    t 21:

    23 2

    0 D

    ecem

    ber

    2014

  • nonstate sector is 0.91 (row 1). On the other hand, the

    corresponding figure for the state sector is practically

    zero (row 4). For the purpose of comparison, the

    correlation coefficients for the national economies of

    OECD member countries reported in BW (2004) are

    quoted (row 9). Surprisingly, the magnitude of the

    correlation across the OECD member countries

    (0.62) is much lower than that for the nonstate

    sector in China. These comparisons suggest that the

    degree of domestic capital mobility within the bank-

    ing system in the nonstate sector, in contrast with that

    in the state one, is much lower than international

    capital mobility among the OECD member countries.Figure 1 shows the local deposit rates and the local

    loan rates for the state sector (and the nonstate

    sector) averaged over the years 1999 to 2005. As

    shown in Fig. 1, the averaged values of deposit and

    loan rates for Beijing are relatively high. This could

    be due to the fact that the headquarters of the

    Big Four banks in China (Bank of China, China

    Construction Bank, Industrial and Commercial

    Bank of China and Agricultural Bank of China),

    are all located in Beijing. To remove its effects,

    I recalculate the simple correlation excluding

    Beijing, then the new coefficient for the nonstate

    sector (the state sector) is 0.80 (0.06). The results

    remain practically unchanged.Simple correlations, however, only provide

    a preliminary measure of the domestic integration

    of the bank loan market. National- and province-

    specific shocks that can affect the magnitude of

    correlation coefficients between deposit and loan

    rates, other than those owing to the integration of

    the bank loan market, should be controlled.

    I, therefore, apply the conditional FH test developed

    by Iwamoto and van Wincoop (2000) to the Chinese

    provinces to control for these factors.4 The steps

    are as follows. First, I control for national

    Table 1. Estimation of b with AR(1)/fixed effect

    (1) (2)

    Regression of total loans/provincial GDP on Coefficient p-value Coefficient p-value

    SOE output/total output 0.478 (0.179) 0.008 0.459 (0.203) 0.025(SOE output/total output) (Coastal dummy) 0.068 (0.620) 0.913AR(1) 0.448 (0.118) 0.000 0.450 (0.110) 0.000Province dummy Yes YesR2 0.921 0.920Obs. 186 186

    Notes: The dependant variable is the total loan as a share of the provincial GDP during 19992005; SOE output/total outputis the output share of state-owned enterprises; Coastal dummy is a dummy variable that equals one if the province is locatedin the coastal region (Beijing, Tianjin, Hebei, Liaoning, Shangdong, Shanghai, Jiangsu, Zhejiang, Fujian, Guangdong,Hainan and Guangxi) and zero otherwise. Regressions are estimated with AR(1) and fixed effects. Robust SEs, which havebeen corrected for cross-section heteroscedasticity, appear in round brackets.

    Table 2. Correlation between local loan rates and local deposit rates

    Sector Method Period Author Coefficient

    China Nonstate U 19992005 This article 0.909***China Nonstate C (FE) 19992005 This article 0.818***China Nonstate C (2SLS/FE) 19992005 This article 0.839***China State U 19992005 This article 0.040China State C (FE) 19992005 This article 0.024China State C (2SLS/FE) 19992005 This article 0.011China All U 19902001 BW (2004) 0.505**China All C (FE) 19902001 BW (2004) 0.580**OECD All U 19902001 BW (2004) 0.617**OECD All C (FE) 19902001 BW (2004) 0.285**

    Notes: The Two-Stage Least Squares (2SLS) method is used with the lagged right-hand-side variables and province-specificeffects as instruments. *** and ** indicate significance at the 1 and 5% levels, respectively.

    4 Iwamoto and van Wincoop (2000) themselves implement this methodology to examine financial integration across Japaneseprefectures.

    New evidence on segmentation of the bank loan market in China 1215

    Dow

    nloa

    ded

    by [

    Chi

    nese

    Uni

    vers

    ity o

    f H

    ong

    Kon

    g] a

    t 21:

    23 2

    0 D

    ecem

    ber

    2014

  • and province-specific shocks by regressing the

    provincial deposit rates, the provincial loan rates

    for the state sector, and the provincial loan rates

    for the nonstate sector on province-specific determi-

    nants that can affect co-movements between depos-

    its and loans:

    Loan Rate for SOEsi;t 0 YLocal Business Conditioni;t FGovt Consumption=Local GDPi;t

    X

    i

    iProvince Dummyi

    X

    t

    tYearly Dummyt eSLi;t 2

    Loan Rate for Non-SOEsi;t 0 YLocal Business Conditioni;t FGovt Consumption=Local GDPi;tX

    i

    iProvince Dummyi

    X

    t

    tYearly Dummyt eNSLi;t 3

    Deposit Ratei;t 0 YLocal Business Conditioni;t FGovt Consumption=Local GDPi;tX

    i

    iProvince Dummyi

    X

    t

    tYearly Dummyt eDi;t 4

    Fig. 1. Averaged local deposit and loan rates over 19992005Notes: average values of deposits and loans for the state sector (a) and those for the nonstate sector (b) as a share of theprovincial GDP.

    1216 M. Ohkuma

    Dow

    nloa

    ded

    by [

    Chi

    nese

    Uni

    vers

    ity o

    f H

    ong

    Kon

    g] a

    t 21:

    23 2

    0 D

    ecem

    ber

    2014

  • The right-hand-side variables are local business

    conditions, local government consumption (as

    a share of the local GDP), province-specific effects

    and year-specific effects. By applying the Hodrick

    and Prescott (HP) filter to the provincial GDP series

    (Hodrick and Prescott, 1997), local business condi-

    tions are calculated by subtracting the HP (100)

    filtered log(national GDP) from the HP (100) filtered

    log(province GDP). Note that national shocks that

    can affect local deposits and local loans are absorbed

    into the yearly dummy.The residuals eSLi,t and e

    Di,t from Equations 2 and 4,

    and eNSLi,t and eDi,t from Equations 3 and 4 are then

    used to compute the new correlations between local

    deposit rates and local loan rates for the state and the

    nonstate sectors, respectively.When the national trend and province-specific

    determinants that can affect local deposits and

    loans are controlled, the correlation between the

    deposit rates and the loan rates for the nonstate

    sector drops slightly from 0.91 to 0.82 (row 2), but

    remains much higher than the corresponding figures

    between the total deposit and total loan rates

    across Chinese provinces and OECD member

    countries calculated by BW (2004) (quoted in

    rows 8 and 10). On the other hand, the correlation

    for the state sector is negative but statistically

    insignificant (0.02, row 5).To address possible endogeneity in right-hand-

    side variables, I estimate Equations 2, 3 and 4 using

    the 2SLS method, with the lagged right-hand-side

    variables and province-specific effects as instruments.

    Nonetheless, it produces practically no changes in the

    results (rows 3 and 6).The results suggest that there exist strong barriers

    to cross-regional funds allocation within the bank-

    ing sector in the nonstate sector in China. What

    causes them? The Chinese government has con-

    ducted a series of policy reforms in the banking

    system since the 1980s. For instance, a national

    unified inter-bank market was created and inter-

    bank interest rates were liberalized in 1996, and

    both state-owned and nonstate-owned commercial

    banks were permitted asset and liability manage-

    ment based on their profit incentives by the end of

    1998 (e.g. Park and Sehrt, 2001; Wu, 2004). These

    policy changes should have facilitated domestic

    funds allocation within the banking sector.

    Therefore, serious asymmetric information problems

    that exist between banks and non-SOEs rather than

    the institutional peculiarities of the Chinese banking

    system seem to lead bank lending to local non-

    SOEs to depend highly upon the local deposits

    within China.

    IV. Concluding Remarks

    This article examines the dependency of local banklending on local deposits within China in the FH vein.In the case of a transition economy like China, itwould be appropriate to assume the presence ofa significant level of disparity in the cost of fundsbetween SOEs and non-SOEs. For this purpose,a dataset of the provincial deposit rates and theprovincial loan rates for the state and the nonstatesector is built. Even after controlling the national-and province-specific shocks, the correlation betweenthe local deposit rates and the local loan rates for thenonstate sector, in contrast to that for the statesector, is even higher than for OECD membercountries. In spite of a series of policy reforms inthe banking system conducted by the Chinesegovernment since the 1980s, these findings suggestthat serious asymmetric information problemsbetween banks and non-SOEs might impede cross-regional lending to them and prevent the develop-ment of the nonstate sector within China.

    Acknowledgements

    I would like to thank Masaharu Hanazaki and TeruoMori for their useful comments and suggestions. Anyremaining errors are my own. This research wassupported by Waseda University Grant for SpecialResearch Projects (2008A-833).

    References

    Allen, F., Qian, J. and Qian, M. (2008) Chinas financialsystem: past, present and future, in Chinas GreatEconomic Transformation (Eds) L. Brandt andT. G. Rawski, Cambridge University Press,Cambridge, pp. 50668.

    Boyreau-Debray, G. and Wei, S. J. (2004) Can China growfaster? A diagnosis of the fragmentation of its domesticcapital market, IMF Working Paper No. WP/04/76,International Monetary Fund, Washington, DC.

    Coakley, J., Farida, K. and Smith, R. (1998) The FeldsteinHorioka puzzle and capital mobility: a review,International Journal of Finance and Economics, 3,16988.

    Feldstein, M. and Horioka, C. (1980) Domestic saving andinternational capital flows, Economic Journal, 90,31429.

    Fisman, R. and Love, I. (2004) Financial development andintersectoral allocation: a new approach, Journal ofFinance, 59, 2785807.

    Hodrick, R. J. and Prescott, E. C. (1997) Postwar USbusiness cycles: an empirical investigation, Journal ofMoney, Credit and Banking, 29, 116.

    New evidence on segmentation of the bank loan market in China 1217

    Dow

    nloa

    ded

    by [

    Chi

    nese

    Uni

    vers

    ity o

    f H

    ong

    Kon

    g] a

    t 21:

    23 2

    0 D

    ecem

    ber

    2014

  • Iwamoto, Y. and van Wincoop, E. (2000) Do bordersmatter? Evidence from Japanese regional net capitalflows, International Economic Review, 41, 24169.

    King, R. G. and Levine, R. (1993) Finance and growth:Schumpeter might be right, Quarterly Journal ofEconomics, 108, 71737.

    Park, A. and Sehrt, K. (2001) Tests of financial inter-mediation and banking reform in China, Journal ofComparative Economics, 29, 60844.

    Payne, J. E. and Mohammadi, H. (2006) Capital mobilityand savings-investment correlations: panel dataevidence from transition economies, AppliedEconomics Letters, 13, 61113.

    Rajan, R. G. and Zingales, L. (1998) Financial depen-dence and growth, American Economic Review, 88,55986.

    Wu, J. (2004) Chinese Economic Reform, Shanghai Far EastPublishers, Shanghai.

    Yamori, N. (1995) The relationship between domesticsavings and investment: the FeldsteinHorioka testusing Japanese regional data, Economics Letters, 48,3616.

    Zhang, J., Wan, G. and Jin, Y. (2007) The financialdeepening-productivity nexus in China: 19872001,Journal of Chinese Economic and Business Studies, 5,3749.

    1218 M. Ohkuma

    Dow

    nloa

    ded

    by [

    Chi

    nese

    Uni

    vers

    ity o

    f H

    ong

    Kon

    g] a

    t 21:

    23 2

    0 D

    ecem

    ber

    2014

Recommended

View more >