Serving Multiple ‘Masters’: Evidence from the Loan Decisions of a State-Owned Publicly Listed Bank Around a Massive Economic Stimulus Programme

Abstract

Using China’s 2008 four-trillion-yuan economic stimulus as a laboratory and proprietary loan data, we study how a large state-owned publicly listed bank responds to the government’s countercyclical financing initiative while being constrained by the need to cater to the bank regulator and public investors. We find that the bank exhibited little change in the process of setting internal credit ratings, and internal ratings remain a valid, albeit weaker, predictor of interest rates in the stimulus period. Weakened rating-interest rate relation is concentrated in borrowers that are state-owned enterprises or in stimulus-favored industries. Interest rates also remain a valid predictor of loan outcomes in the stimulus period. Overall, there is no systematic evidence that loan decisions of the state-owned bank are severely compromised in the stimulus period as speculated by media. The study adds to the limited understanding of how partially privatized state-owned banks operate and is relevant to the longstanding debate over the roles of state-owned banks.