Bureaucrats, state banks, and the efficiency of credit allocation: The experience of Chinese state-owned enterprises

We describe features of the Chinese financial system that inhibited effecti ve financial intermediation from 1980 to 1994 and investigate whether, desp ite these impediments, bank finance flowed to state-owned enterprises with higher subsequent productivity than did direct government transfers. We fin d that it did, at least in the 1980s, and conclude that bank employees asse ssed SOE credit risks substantially better than did the bureaucrats respons ible for allocating direct transfers. Banks imposed harder budget constrain ts on SOEs than bureaucrats, but those constraints softened as the 1990s pr ogressed. As a result, increased bank finance did not flow to relatively pr oductive SOEs later in the period, (C) 2000 academic Press.