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11. Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms

Author:
Robert Cull, Bo Sun, and Lixin Colin Xu
Publication Date:
01-2015
Content Type:
Commentary and Analysis
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We examine the role of firms’ government connections, defined by government intervention in CEO appointment and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. We demonstrate that government connections are associated with substantially less severe financial constraints (i.e., less reliance on internal cash flows to fund investment), and that the sensitivity of investment to internal cash flows is higher for firms that report greater obstacles to obtaining external funds. We also find that those large non-state firms with weak government connections, likely the engine for innovation in the coming years in China, are especially financially constrained, due perhaps to the formidable hold that their state rivals have on financial resources after the ‘grabbing-the-big-and-letting-go-the-small’ privatization program in China. Our empirical results suggest that government connections play an important role in explaining Chinese firms’ financing conditions, and provide further evidence on the nature of the misallocation of credit by China’s dominant state-owned banks.
Topic:
Privatization, Governance, Business, Fiscal Policy, Innovation, and Banking
Political Geography:
China and Asia

12. Do Financing Biases Matter for the Chinese Economy?

Author:
Yasheng Huang
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
It is widely acknowledged that China’s financial system is deeply troubled. Its banks have very high nonperforming loan ratios and its stock market has lost 50 percent of its value since 2001 amidst a GDP growth rate averaging some 9 percent a year. Those facts about the accounting aspects of China’s financial system are becoming better known in the West. However, what has not been sufficiently highlighted is the precise effect of China’s dysfunctional financial system and its broader pattern of allocating resources—in favor of the state sector at the expense of the private sector—on the Chinese economy and society. Probably the only reason economists and business analysts have found it hard to reconcile the accounting aspects of China’s financial system with the performance aspects of the Chinese economy is that China’s GDP growth has been so impressive. Some experts (e.g., Rawski 2001,Young 2003) have argued that China’s economic performance has not been as impressive as the official statistics indicate. Their work in this area delves into rather specialized and arcane areas of Chinese methods of compiling and reporting data. While this work is analytically important and does resolve some of the puzzles of China’s rapid growth, it is very technical and difficult for nonspecialists to understand. Thus, it is unlikely to grab readers’ attention away from newspaper headlines touting the rise of China and the huge trade surpluses that country has accumulated.
Topic:
Economics, Finance, Economy, Banking, and Bias
Political Geography:
China and Asia

13. Five Persistent Myths About China's Banking System

Author:
Jonathan Anderson
Publication Date:
07-2006
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Of all the various topics and issues facing observers of the Chinese economy, it is safe to say that none arouses more spirited debate than the role of the financial system, and in particular the state of Chinese banks. Is the mainland on the verge of a financial crisis? Has the recent economic overheating created a new flood of bad loans? Do banks know how to allocate capital, or are they simply quasi-fiscal agencies acting at the mercy of the government? And does the rapidly opening financial system represent a gold mine or a “black hole” for foreign investors? The answers to these questions are not always straightforward, but in our experience the truth lies very much away from the extremes so often presented in the financial press. Chinese banks are by no means “out of the woods,” first and foremost because they remain stateowned institutions, but they are now well advanced from their situation only a decade ago. This means that the economy is protected from the risk of a financial crisis—but, on the other hand, the banking sector is more a sunset industry than an exciting growth sector. There are a number of myths about banks and the financial system in China but the following are the most important and most persistent: (1) China’s cost of capital is far too low; (2) Mainland banks are unreconstructed quasi-fiscal agencies; (3) Bank recapitalization is a sham; (4) Banks are already “out of the woods”; and (5) The Chinese banking system is an exciting growth industry. Let us now examine these five myths.
Topic:
Economics, Financial Crisis, Finance, Economic Growth, and Banking
Political Geography:
China and Asia