The bank-firm relationship: Helping or grabbing?

This paper asks whether banks help or grab the enterprise in the real economy. Using the firm-level data on Chinese enterprises during 2001-2007, we find that interest payment of private enterprises is negatively related to the return on sales (ROS) and asset growth, which implies a detrimental effect of bank loans on private firms' performance. But this linkage is significantly positive for state-owned enterprises. Focusing on private enterprises, the grabbing impact from banks is strongest for firms without government subsidies, with low production values, with small size, or with low capital intensity. Our results are robust to alternative estimation approach and variable specifications. To conclude, the bank-centred financial system in China has assisted in the development of state-owned enterprises, while the development of private enterprises has been impeded by Chinese banks.