Bank finance for private firms in China: Does political capital still pay off?

Abstract

This paper investigates whether political connection can help private firms in China gain access to commercial bank loans. Based on data from the 2012 Nationwide Survey of Private Enterprises in China, it finds that: (i) politically connected firms were more likely to have access to commercial bank loans; (ii) the mechanism for this better access might be that, on the one hand, political connection was used by private firms as a tool to overcome discrimination and/or information asymmetry in the loan market; on the other hand, political connection was seen by banks as a signal of creditworthiness; and (iii) the importance of political connection seems to lie in the connection to the power to govern rather than the mere opportunity to influence policy.