How Banks in China make Lending Decisions

Based on interviews conducted in four major Chinese cities, this paper examines the determinants of lending by state-owned commercial banks (SOCBs) to manufacturing firms in China. The conventional relationship banking and transaction lending theories helps explain at least part of the lender-borrower relationship in China. The perceived lending bias against non-state-owned enterprises could actually be reconciled as rational decision-making by SOCBs, partly due to the higher risk involved and/or high transaction costs in the risk evaluation of such lending. The existence of unofficial lending criteria at SOCBs nonetheless provides golden rent-seeking opportunities for unscrupulous bankers to exploit the regulatory loopholes for financial gain.