How government fiscal decentralization shapes bank competition dynamics: City-level evidence from China

Fiscal decentralization has played an increasingly prominent role in driving China's economic growth, yet its influence on distortions in banking competition remains insufficiently examined. Drawing on data from 250 Chinese banks, we show that increased municipal government fiscal expenditure enhances local banks' market power, primarily by improving the performance of local firms, facilitating industrial upgrading, and driving digital advancements. This effect is especially pronounced for non-central state-owned banks with lower customer concentration and less capital-intensive operations in vibrant and central cities. Additionally, the effects of fiscal reform and the establishment of bankruptcy courts work in tandem to ensure bank market positions. Furthermore, while government expenditure may have a delayed but escalating impact on market power, the long-term influence of fiscal decentralization is more likely to shape banks' risk-weighted lending portfolios, even as improvements in bank efficiency may diminish over time.