Loan Extension in China: a Rational Affair

Against the background of the problem of Non Performing Loans, the lack of data causes banking behaviour in China being wrapped in mystery. By making use of data reported by Shenzhenlisted firms, this paper reveals some stylized facts on loan extension in China. For that purpose both static and dynamic panel data estimation techniques are applied to investigate the relationship between a firm's debt position and some potential explanatory variables. In its approach, the paper differs from the corporate leverage literature in the sense that it focuses on bank behaviour. The results, as they come forward in the paper, provide mixed evidence regarding the soundness of loan extension policy of Chinese banks. On the one hand, banks seem to pursue a restrictive policy towards firms that face poor profit performance. On the other hand, factors that are generally considered as being important conditions on loan extension by banks do not have the effect ascribed to them by both intuition and the literature.