BANK LOANS, SELF-FINANCING, AND GRANTS IN CHINESE SOES - OPTIMAL POLICY UNDER INCOMPLETE INFORMATION

This paper offers a model of the allocation of fund in Chinese state-o wned enterprises (SOE) and provides an empirical test of the theory us ing firm-level data. The paper explains why bank loans and grants coex ist with self-financing, which SOEs take out loans, and why subsidies on loan interest payments exist. The model is based on heterogeneous S OEs, asymmetric information, sales taxes, and quota requirements. The results show that reforms of enterprise finance must come as a package , suggesting that the interlocking nature of reform measures should be considered in deciding the direction of further policy modification. (C) 1997 Academic Press.