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| The Impact of Banking Market Structure on Productivity:Evidence from Industrial Enterprises |
| CAI Weixing
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| School of Finance, Guangdong University of Finance and Economics |
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Abstract The duty of the financial sector is to serve the real economy. In the new era, the core mission of the financial sector is to support high-quality development in the real economy. To this end, China's central government recently proposed a structural reform of the financial supply side. General Secretary Xi Jinping delivered an important speech to the Political Bureau of the Central Committee, emphasizing the need to deepen our understanding of the international and domestic financial situation and the structural reform of the financial supply to better service the real economy. The structural reform of China's banking industry is an important part of the structural reform of the financial supply side. With the continuous reform and opening up over the past four decades, the banking industry has gradually changed from a highly monopolized market structure to a more competitive one.
An important characteristic of the Chinese banking industry is its local markets, due to licensing controls and the restriction of business scope. The national commercial banks rely on local branches to compete with local, rural, and other commercial banks. Researchers thus need to measure the banking market structure at a more regional level. However, the lack of bank loan data at the regional level makes this difficult. Fortunately, the China Banking Regulatory Commission website provides unique data on the financial licenses of commercial bank branches, including information on the approval time and office location of each branch. We manually downloaded and collected the financial license information of all commercial bank branches, and constructed a municipal-level market structure measure.
Theoretically, there are two main views on banking market structure: the market power hypothesis and the information hypothesis. The basis of the market power hypothesis is classical industrial organization theory. Starting from the classical SCP monopoly leads to an insufficient loan supply and higher loan interest rates, while enhancing competition can reduce financing costs and increase credit. The market power hypothesis predicts a positive relation between competition in the banking sector and firm productivity. In contrast, the theoretical basis of the information hypothesis is information asymmetry. It considers that banks with strong market monopoly power are more likely to form long-term relations with borrower enterprises, and provide more contractual instruments to screen borrowers and reduce their moral hazard. As a result, more investment projects may receive bank loans, whereas market competition weakens the incentives for banks to establish good relations with enterprises and obtain corporate information, leading to a reduction in the availability of corporate finance.
Using a unique dataset for the period 2002-2007, we find that more intensive competition in the banking sector improves productivity, supporting the market power hypothesis. We also find strong evidence that financial constraints are reduced under a more competitive banking market structure. Furthermore, this effect is more pronounced for small enterprises, non-state-owned enterprises (NSOEs), young enterprises, and enterprises in high-tech industries.
The potential contributions of our paper are as follows. First, we construct the market structure of the Chinese banking industry at the municipal level, whereas most previous studies are concentrated at the national or provincial levels. Second, our findings complement the research on resource allocation and total factor productivity. While most discussion on this topic is focused on the impact of misallocation on total factor productivity, the more important issue is how to reduce the distortion of resource allocation. Third, our research is also related to the relationship between banking market structure and economic growth. We provide micro-level evidence based on enterprise data whereas most research is focused on the macro perspective. Last, our findings confirm the theory of optimal financial structure in economic development. According to this theory, China's optimal financial system should be dominated by small and medium regional banks rather than large banks.
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Published: 29 April 2019
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