The impact of government property right law on collateral loans: A quasi-natural experiment based on the enactment of Chinese property law

Abstract

We examine how the enactment of the China Property Law (the Law) affects bank loans, especially those using liquid assets as collateral. Using loan-level data and a difference-in-differences method, we find a significant increase in bank loans with liquid assets as collateral after the Law. In addition, we find that the effect of the Law on collateral loans is more pronounced for state-owned firms, firms with better corporate governance, firms with higher information transparency, or during periods of loose monetary policy; these findings indicate that banks are more likely to provide loans with liquid assets as collateral to high-quality firms in the circumstances of abundant credit. We also find that the enactment of the Law increased working capital, inventory turnover, and business risks for firms, suggesting that these loans accelerated capital turnover and reduced inventory storage while exposing firms to higher risks.