THE SIAMESE TWINS - DO STATE-OWNED BANKS FAVOR STATE-OWNED ENTERPRISES IN CHINA

Using city-level data over 1989-1991, we find relatively clear evidenc e that China's bank loans favor state-owned industrial enterprises. Us ing a simple model, we argue that the lending bias diminishes the effe ctiveness of other measures designed to promote the growth of non-stat e sectors or to induce SOEs to restructure. A policy implication of th e study is that the reform of the banking sector, in particular, its l ending policy should be implemented simultaneously with the reforms of state-owned industrial enterprises.