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The interest group theory of banking sector expansion in China: Evidence from a quasi-natural experiment

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  • Liu, Guanchun
  • Zhang, Chengsi
  • Zhu, Yueteng

Abstract

This study investigates whether the state-owned enterprise group inhibits banking sector expansion, thus impeding competition in China, as depicted in the interest group theory. To address potential endogeneity, our identification scheme employs a Chinese bank-deregulation policy for joint-equity and city commercial banks implemented in 2009. We collect Chinese bank branch data manually and use the difference-in-difference estimation method to explore two-dimension variations in the interest group theory: state-owned shareholding and year. The results show that higher state-owned shareholdings lead to fewer commercial bank entries, especially in regions with more intensive industry and bank competition. A further counterfactual analysis indicates that a 24% loss of the observed increase in the number of small- and medium-sized banks from 2009 to 2013 is attributed to impediments of state-owned capital. These findings suggest that mitigating the influence of state-owned enterprises is likely to simultaneously promote financial development and capital allocation efficiency.

Suggested Citation

  • Liu, Guanchun & Zhang, Chengsi & Zhu, Yueteng, 2020. "The interest group theory of banking sector expansion in China: Evidence from a quasi-natural experiment," Journal of International Money and Finance, Elsevier, vol. 107(C).
    • Handle: RePEc:eee:jimfin:v:107:y:2020:i:c:s0261560620301819
    DOI: 10.1016/j.jimonfin.2020.102225
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    More about this item

    Keywords

    Banking sector expansion; State-owned enterprises reform; Interest group theory;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P21 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Planning, Coordination, and Reform

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