Between Mao and markets: new evidence on segmentation of the bank loan market in China

This article examines the local bank lending's dependency upon local deposits within China in the Feldstein-Horioka vein. In the case of a transition economy like China, it would be appropriate to assume the presence of a significant level of disparity in the cost of funds between State-Owned Enterprises (SOEs) and non-SOEs. For this purpose, a dataset of the provincial deposit rates and the provincial loan rates for the state and the nonstate sectors is built. Even after controlling the national- and province-specific shocks, the correlation between the local deposit rates and the local loan rates for the nonstate sector, in contrast with that for the state sector, is even higher than for the Organization for Economic Co-operation and Development (OECD) member countries. The findings suggest that serious asymmetric information problems between banks and non-SOEs might impede cross-regional lending and prevent the development of the nonstate sector within China.