The Policy of Foreign Bank Entry and Export Upgrading: Evidence From Chinaʼs WTO Accession

Abstract

This paper examines the impact of the staggered rollout of deregulation policies on foreign banksʼ access to domestic firms following Chinaʼs entry into the WTO in 2001. We find that the policy raises the probability of export entry among non-exporting firms by approximately 50 percentage points, and the probability of upgrading from processing to ordinary trade among processing-only firms by approximately 15–17 percentage points. We evaluate two mechanisms: improved credit access and reduced information frictions. The balance-sheet evidence indicates meaningful increases in borrowing, leverage, production, and sales after deregulation, with modest and suggestive evidence on heterogeneity patterns related to ex ante financial constraints. By contrast, the evidence for an information channel is sharper: firms become more likely to export to the home countries of locally present foreign banks, especially when informational frictions with those destinations are larger. These findings suggest that foreign banking liberalisation can promote export upgrading not only by easing financing margins, but also by helping firms enter more information-intensive trade relationships.