Bank Credit for SMEs: Internal Organization and the Assessment of Credit Risk in China, 2018

Zhao, Tianshu (2022). Bank Credit for SMEs: Internal Organization and the Assessment of Credit Risk in China, 2018. [Data Collection]. Colchester, Essex: UK Data Service. 10.5255/UKDA-SN-855446

The Chinese financial system has served the Chinese economy well in the early stages of development in channeling domestic savings to domestic investment. But, continued financial repression, along with a growing middle class and ageing population has created pressure on savings to 'search for yield'. At the same time, the dominance of lending to state-owned-enterprises, political constraints, inefficiencies and weak risk management practice by financial institutions (FI) have pushed SMEs to alternative sources of funding. The demand for yield from savers and funds from private investment has been met by the rapid growth in shadow banking. This study encompasses two of the identified themes of the research call. The research theme 'alternative strategies for reform and liberalization' covers the role of the Shadow Bank system in the credit intermediation process. This research is of critical importance because it informs the macroeconomic research necessary for investigating 'the role of the Chinese financial system in sustaining economic growth'. Addressing the first research theme we take a dual track approach to better understand the role of the financial system in sustaining in economic growth. The first track examines the role of bank and non-bank finance in promoting long-term economic growth at the regional level. The second track is aimed at the more short-term issue of identifying the potential frequency of macro-economic crises generated by a banking crisis. The finance-growth nexus is a well-established area of economic development, however the China experience questions the supposition that financial development is a necessary precondition. The empirical findings are mixed. Part of the reason for this could be the failure to distinguish between the quality of financial institutions across regions, and the openness of the local environment in terms of the balance between private and public enterprises. Our research would build on the existing literature in two ways. First, it would utilise imperfect but available data on informal finance to examine direct and spill-over effects on medium term growth from contiguous provinces. Second, primary data on the geographic dimension in shadow bank lending gleaned from Theme 2 research will be used to design a weighting system to adjust financial flows for the quality of the local financial environment. The second prong will develop a small macroeconomic model of a hybrid DSGE type that incorporates a banking sector including shadow banks. Such models have been developed for China in recent times but only a few have attempted to incorporate a banking sector. These models are mostly calibrated versions and make no attempt to test the structure against the data. Recent attempts to test a hybrid New Keynesian-RBC DSGE type model for the Chinese economy using the method of indirect inference have been successful and inclusion of a shadow banks have shown some success. The results of the Theme 2 study will inform the development of a fuller shadow banking sector in the macroeconomic model that will be used to estimate the frequency of economic crises generated by bank crises. Theme 2 research will examine the relationship between the banking system and the shadow banking system as complements or substitutes. It will aim to determine the variable interest rate on the P2P online lending platform on the basis of risk-return, the home bias in online investments, and the signaling and screening in the P2P online lending platform. Finally, it will aim to identify the impact of shadow banking on entrepreneurial activity, the industrial growth rate and regional housing investment and price differentials. These results would inform the theme 1 research on the interconnectedness of shadow banking with the mainstream and the fragility of the financial system to shocks and financial crises.

Data description (abstract)

A survey of bank managers working in the operation and credit risk department at different hierarchical levels of individual commercial banks in China responsible for bank credit analyses and risk evaluations covering the procedure from loan application to final decision. The objective is to understand the internal organization arrangement of Chinese commercial banks in the provision of bank credit to SMEs. The focus is on the incentives and constraints faced by branch managers in the interaction with SMEs. The enquiry reflects the notion that the branch manager who directly interacts with the SME borrower plays a critical role in the information collection and processing in the lending decision. The incentives and constraints faced by branch manager are shaped by the type of organization of the bank: the degree of decision-making centralization, modes of communication between hierarchical levels, and the adoption of statistical techniques for risk evaluation.

Data creators:

Creator Name	Affiliation	ORCID (as URL)
Zhao Tianshu	University of Birmingham	https://orcid.org/ 0000-0001-6549-3334

Sponsors:

Economic and Social Research Council

Grant reference:

ES/P004199/1

Topic classification:

Economics

Keywords:

CREDIT, BANKS, MANAGEMENT, MANAGERS, BUSINESSES

Project title:

Shadow Banking and the Chinese Economy: A Micro to Macro Modelling Framework

Grant holders:

Kent Matthews

Project dates:

From	To
1 January 2017	28 February 2021

Date published:

01 Mar 2022 08:47

Last modified:

01 Mar 2022 08:47

Coverage and Methodology

Access and Administration

Data sourcing, processing and preparation:

The questions were formulated in Nov, 2017 and piloted toward targeted respondents of three banks in Dalian and one in Shanghai. Based on the pilot, the questions are revised in Dec, 2017. The questionnaire was formally distributed to the targeted bank managers of targeted banks in Jan, 2018. To allow for the opportunity to cross-verify information collected, the questionnaire was distributed to the branch of a given bank at the same hierarchical level in the same municipality and in different municipalities. The connections with the bank managers to answer the questionnaire, were established before the questionnaire was distributed, either directly and/or indirectly. In total 103 responses were collected between Jan, 2018 and Feb, 2018. It compasses answers of 8 headquarters and 95 branches/sub-branches of 22 banks. The responses have the 5-stated owned bank and 12 joint-stock banks as planned and include one of five privately owned banks and 3 city commercial banks. The review of the responses to the questionnaire was conducted and completed in April 2018. A large degree of discrepancy in answering the same question from the branch at the same the hierarchical level of the same bank in the same municipality was revealed. The difference appears for each of 22 banks, and it could not be reconciled from the response to the questionnaire answered by the headquarters of the bank. A follow-up face-to-face interview was planned and was conducted between August 2018 and September 2018, in Dalian. The purpose was to test for the extent to which the follow-up face-to-face interview could correct the discrepancy. The scale of the discrepancy and the need for further clarification was too challenging. The team decided to pause the full-scale follow-up face-to-face interview and abandoned this line enquiry. The survey was conducted in Chinese. The questions and responses have been translated to English and both are included in the data file.

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