The Impact of Foreign Bank Deregulation on Firm Performance: Evidence from China

Following the deregulation policies implemented by the Chinese government in 2001, foreign banks were allowed to enter the Chinese banking market gradually, in different years in different cities. As a result, from 2001 to 2006 firms in different cities had differential access to foreign bank credit. Using an extensive firm-level dataset from the manufacturing census in China, this paper studies the impact of foreign bank entry at the city level on domestic firms’ credit access and real outcomes. Empirical results suggest that after foreign bank entry, private-owned firms which were previously more credit-constrained obtained more bank loans, increased investment and increased sales significantly more than state-owned firms, which were previously less constrained. The findings provide evidence that policy-driven positive foreign credit supply shocks could reduce domestic firms’ financing constraints, especially for private-owned enterprises. In addition, I investigate the hypothesis that foreign bank entry intensified competition in the domestic banking sector, using a newly constructed regional bank competition index. Results confirm that increases in bank competition brought by foreign bank entry improved credit access for private-owned firms relative to state-owned firms.