Government control structure and allocation of credit: evidence from government-owned companies in China

Abstract

This paper examines the effects of government control structure on the allocation of bank credit to government-owned firms in China. It particularly examines the extent to which differences in institutional environments across the diverse regions of China affect the nexus between government control structure and levels of credit allocation. The analysis indicates that local governments pursue bank credit more aggressively for the firms they control than do higher ranked government units. Furthermore, the evidence indicates that government units are more disposed to pursue bank credits for firms which they control through state asset management bureaus than for firms which they control via state-owned entities. Importantly, these outcomes are less important in regions characterised by a good institutional environment than in those characterised by a poor institutional environment. Therefore, to minimise the need for government intervention in credit allocation to firms, regional governments should seek to establish quality institutional infrastructure.