The interest group theory of banking sector expansion in China: Evidence from a quasi-natural experiment

Abstract

This study investigates whether the state-owned enterprise group inhibits banking sector expansion, thus impeding competition in China, as depicted in the interest group theory. To address potential endogeneity, our identification scheme employs a Chinese bank-deregulation policy for joint-equity and city commercial banks implemented in 2009. We collect Chinese bank branch data manually and use the difference-in-difference estimation method to explore two-dimension variations in the interest group theory: state-owned shareholding and year. The results show that higher state-owned shareholdings lead to fewer commercial bank entries, especially in regions with more intensive industry and bank competition. A further counterfactual analysis indicates that a 24% loss of the observed increase in the number of small- and medium-sized banks from 2009 to 2013 is attributed to impediments of state-owned capital. These findings suggest that mitigating the influence of state-owned enterprises is likely to simultaneously promote financial development and capital allocation efficiency.