Economic and Political Motivations in Debt Finance in China: Bank Lending and Trade Credit Offering

Abstract

Using matched datasets constructed from firm-level micro-data and hand-collected bank branch data, this study examines economic and political motivations by banks and supplier firms in bank lending and trade credit offering in China. First, statistical evidence shows that economic motivation is dominant over political motivation. Second, competition among domestic banks and with foreign banks has been found to motivate domestic banks to lend money to private firms by economic motivation. Third, a private firm’s political connections and more easily collateralized assets diminish the economic motivation to find better-performing borrower firms in bank lending to private firms.