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.