Finance and Firm Export in China

Although China has won many plaudits for its rapid transformation from an autarky to theworld’s largest recipient of foreign direct investment (FDI) and a regional export power-house, some economists –most notablyHuang (2003, 2004)– are less sanguine about the Chinese government’s long-standing policy that encourages export-oriented FDI. Their main concern seems to be that foreign firms, especially those in labour-intensive industries, divert exports away from financially-constrained indigenous private enterprises. The Chinese banking system has a reputation of lending bias against private firms (e.g. Allen et al. 2005). Until 1998, the four state-owned commercial banks which dominate the banking system in China were instructed not to lend toprivate enterprises.Huang (2003) contends that becauseof this financial repression, domestic private firms found it difficult to engage in contractual arrangementswith foreignbuyers, creatinga fertile condition for foreignfirms to extend equity financing instead. According to this line of argument, a large proportion of export-oriented FDI in China is due to the bias of the financial system that favours stagnant state-owned enterprises over more dynamic private enterprises. As such, the huge flow of FDI into the country should not necessarily be an indicator of the strength of the economy. KYKLOS, Vol. 60 – 2007 – No. 1, 37–54