Using a proprietary loan data set, we study how a large state-owned bank uses its internal ratings in loan granting decisions around China’s 2008 economic stimulus programme that relies on bank credit for financing. We find that there is little change in the rating process of the bank, and internal ratings remain a valid, albeit weaker, predictor of loan interest rates in the stimulus period. Weakened rating-interest rate relation is concentrated for borrowers from the industries that the stimulus programme focuses on, for state-owned enterprises (SOEs), for bank branches operating in provinces with a low level of credit market marketization, or when the credit rater and loan officer have no collaboration before. We also find that interest rates remain a valid predictor of ex-post loan outcomes in the stimulus period. Overall, there is no evidence that loan decisions of the state-owned bank are severely compromised in the economic stimulus period as speculated by some media. By showing how a state-owned bank maneuvers between supporting government stimulus initiative and maintaining market-based lending, we contribute to the limited literature on the roles of internal ratings in loan contracting decisions, and add to the debate over the roles of state-owned banks.

In a frictionless market where  rms can always raise capital, debtors default only if their total assets cannot cover their total liabilities. However, in the presence of market imperfection, debtors may default even while solvent if the cost of new capital outweighs the legal penalty on contract violation. Using a unique sample of Chinese bank loans over the period 2007-2012, we analyze the repayment decisions of borrowing rms whose cash holdings are high enough to cover the bank debt coming due. We  nd that poor legal enforcement signi cantly increases the likelihood of default. This positive association becomes stronger if  rms face tighter  nancing constraints, or when credit supply becomes more scarce. Our results illustrate the role of legal enforcement in determining  nancial risks and show that market imperfection strengthening the impact of legal enforcement on  nancial risks.

We study credit allocation across  rms and its real e ects during China's economic stimulus plan of 2009-2010. We match con dential loan-level data from the 19 largest Chinese banks with  rm-level data on manufacturing  rms. We document that the stimulus-driven credit expansion disproportionately favored state-owned rms and  rms with lower average product of capital, reversing the process of capital reallocation towards private  rms that characterized China's high growth before 2008. We argue that implicit government guarantees for state-connected  rms become more prominent during recessions and can explain this reversal.

We examine the role of borrowers’ digital footprints in debt collection. Using a large sample of personal loans from a fintech lender in China, we find that the information acquired by the lender through borrowers’ digital footprints can increase the repayment likelihood on delinquent loans by 18.5%. The effect can be explained by two channels: bonding borrowers’ obligations with their social networks and locating borrowers’ physical locations. Moreover, the lender is more likely to approve loan applications from borrowers with digital footprints, even though these borrowers may occasionally have a higher likelihood of delinquency. The use of digital footprints can remain legitimate under stringent privacy protection regulations and fair debt collection practices. Our findings suggest that digital footprints, as a new type of collateral, can ultimately enhance financial inclusion by facilitating the lender’s collection of delinquent loans.

We investigate the impact of state ownership structure on asset prices and corporate policies. By primarily focusing on China’s corporations, we show that the relationship between expected returns and capital investment varies significantly across state owned enterprises (SOE) and private owned enterprises (POE). A portfolio that longs low investment and shorts high investment firms earns an average annual excess stock return of 5% in the SOE sector. In contrast, there is no relationship between investment and expected returns in the POE sector. We show that the difference in the link between expected returns and investment across SOE and POE firms is driven by their differential exposures to the debt issuance shocks, which captures the monetary supply shocks in China. As SOE firms have easier access to bank loans, the high investment firms in the SOE sector are more able to raise debt despite that debt supply is shrinking, and hence they are less risky. We develop a dynamic model with SOE and POE firms facing different frictions in debt markets. The economic mechanism emphasizes that heterogeneous access to the debt market is an important determinant of equilibrium risk premiums across sectors with different state ownership.

Using proprietary individual level loan data, this paper explores the economic consequences of the 2009 bank entry deregulation in China. Such deregulation leads to higher screening standards, lower interest rates, and lower delinquency rates for corporate loans from entrant banks. Consequently, in deregulated cities, private firms with bank credit access increase asset investments, employment, net income, and ROA. In contrast, the performance of state-owned enterprises (SOEs) does not improve following deregulation. Deregulation also amplifies bank credit from productive private firms to inefficient SOEs due mainly to SOEs’ soft budget constraints. This adverse effect accounts for 0.31% annual GDP losses.

We document that monetary policy has asymmetric effects on investments by large and small firms in China. Large firms’ investment are highly responsive to monetary expansions, but less affected by monetary contractions. In contrast, small firms’ investments are less responsive to monetary expansions, but significantly affected by monetary contractions. We argue that this asymmetric responses of large and small firms stem from their differential access to credits in a two-tiered banking system. Large firms borrow from the big state-owned banks, which have a strong depositor base, whereas small firms borrow mainly from small banks which does not have a large depositor base and therefore rely heavily on the inter-bank market for financing their loans to small firms. We build a DSGE model with heterogeneous banks, heterogeneous firms, and an inter-bank market that is calibrated to the Chinese data. We show that the model’s quantitative predictions about the effects of monetary policy on large and small firms are consistent with the facts we documented.

We study the causes and consequences of growth in shadow banking by examining the Chinese banks’ issuance of Wealth Management Products (WMPs), which are short-maturity off-balance-sheet substitutes for deposits. Using branching overlap data, we instrument deposit availability with banks’ exposure to competition from a large state-owned bank, which substantially increased loan supply to support the fiscal stimulus during the Global Financial Crisis and competed more aggressively for deposits thereafter. We show that deposit market competition has a causal effect on smaller banks’ reliance on shadow banking: exposed banks increased the issuance of WMPs sharply, creating rollover risk for these banks.

Open banking facilitates data sharing consented by customers who generate the data, with a regulatory goal of promoting competition between traditional banks and challenger fintech entrants. We study lending market competition when sharing banks’ customer data enables better borrower screening or targeting by fintech lenders. Open banking could make the entire financial industry better off yet leave all borrowers worse off, even if borrowers could choose whether to share their data. We highlight the importance of equilibrium credit quality inference from borrowers’ endogenous sign-up decisions. When data sharing triggers privacy concerns by facilitating exploitative targeted loans, the equilibrium sign-up population can grow with the degree of privacy concerns.

We investigate how monetary policy in a mixed financial system such as that of China, which is characterized by a juxtaposition of quantity- and price-based policy instruments and the co-existence of regulated and market-determined interest rates, affects bank lending. Using a newly constructed loan-level dataset, we find that loan rates but not loan size are affected by both the regulated and the market-determined interest rates and that loan size is instead affected by an implicit quota that is imposed on aggregate bank lending through window guidance. We interpret this finding to be evidence of credit rationing.