Does banking competition alleviate or worsen credit constraints faced by small- and medium-sized enterprises? Evidence from China

- We examine the effect of banking competition on SMEs' credit constraints in China.
- Lower banking market concentration alleviates financing constraints of SMEs.
- The joint-stock banks have a larger effect than the city commercial banks.
- The joint-stock banks have a larger effect than the state-owned banks.
- The effect is through prices rather than the offering of relationship lending.

Banking competition may enhance or hinder the financing of small and medium-sized enterprises. Using a survey on the financing of such enterprises in China, combined with detailed bank branch information, we investigate how concentration in local banking market affects the availability of credit. We find that lower market concentration alleviates financing constraints. The widespread presence of joint-stock banks has a larger effect on alleviating these constraints, than the presence of city commercial banks, while the presence of state-owned banks has a smaller effect.