We examine the roles of bank ownership and CEO political faction membership in facilitating or hindering the implementation of central bank policy in China. Specifically, we examine the response of China’s commercial banks to People’s Bank of China (PBC) guidelines intended to decrease mortgage lending and to slow down the rise in residential property prices. We find that both bank ownership and faction membership matter. Central government-owned banks whose CEOs are members of the specialist finance faction within the Chinese Communist Party (CCP) respond most strongly to PBC guidance, whereas provincial or city government-owned banks whose CEOs are members of a generalist faction respond least strongly. The implementation of PBC policy has real effects: in those cities where central government-owned banks with specialist CEOs constitute a larger percentage of total bank branches, house prices grew more slowly, as did the number of residential real estate transactions and the number of new listings. Where in contrast provincial and city government-owned banks with generalist CEOs dominate, the number of transactions grew faster; the rate of house price appreciation and the number of listings were however unaffected. We conclude that China’s different levels of government and the CCP’s different factions enjoy some discretion in responding to PBC guidance and that they exploit the discretion they are afforded to vary the strength of their response.

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.