Industrial Policy and State Ownership: Where Does Credit Go?

Abstract

Using a novel dataset with bank-sector level annual loan data from 137 commercial banks in China from 2004 to 2017, along with a quantified industrial policy dataset based on text analyses, I explore how influential industrial policy is in the credit market. Overall, commercial banks do not necessarily allocate more credit to sectors promoted by the central government. Banks have heterogeneous sensitivities to industrial policy. Compared with other commercial banks, rural commercial banks tend to respond most positively to industrial policy. Banks with lower asset quality, a smaller size, a higher liquidity ratio, and not listed are more responsive to industrial policy. On the other hand, sectors that are mainly controlled by state-owned enterprises (SOEs) always benefit relatively more credit when an industrial policy is announced, no matter whether the policy is initially targeting its own sector or other sectors. This is because SOEs are less risky, both economically and politically. Thus, industrial policy is not that powerful in credit reallocation due to the banks' tradeoff between political pressure and profitability. Moreover, it leads to further distortions on financial resource allocation towards SOEs.