Study On Political Achievement Demands, Ownership Of Government And Credit Risk Of City Commercial Bank In China

Since the reform and opening up in1978, thirty years fleeting, in this short time, however, China’s economy has made noteworthy achievements, the achievements has made the world marveled, Zhou Lian (2007,2008), Zhang (2005) and other domestic scholars believe that the best explanation of China’s economic achievements in these thirty years is that the promotion championship among local government officials take the GDP growth as the core of the "tournament". The main content of " Promotion Tournament" is that since the1980s of the last century, China’s cadre management system carried out a series of reforms, both in terms of its connotation and from its denotation have undergone tremendous changes. Local GDP growth as the core of economic performance indicators has woven into the performance evaluation standards among local government officials, and has become increasingly important and prominent. Selection and Promotion among local government officials have a tremendous change which only focusing on the political indicators in the past gradually paying more attention to the economic performance indicators, especially to indicators around the local GDP growth or indicators closely related to the local GDP growth.China’s institutional background is very special, based on such a special context, we have to recognize the fact that the main content of the comprehensive performance evaluation of local government officials are still based on local GDP growth, local fiscal revenue growth as well as investment and capital introduction to measure the level of local economic development, and the employment promotion indicators to measure the level of social stability. This fact is thought-provoking, when the local government faced with a series of adverse external environmental factors in their jurisdiction, for example, the growth of local GDP was slow, the capability of economic development was limited, the lack of local fiscal revenue and the high unemployment rate, etc., these adverse external environmental factors will greatly affect the local government to achieve the political goals in the performance evaluation. Will these political achievement demands of the local government bring any follow-up behavior which resulting any economic consequences?Since China’s financial system reform in the1990s, city commercial banks regarded as the "third tier" of the Chinese banking industry have developed rapidly. Built on the basis of urban credit cooperatives, city commercial banks were invested by residents, the urban enterprise as well as the local fiscal funds, working as joint-stock commercial banks. City commercial banks play an extremely important role in local financing, the development of local economic, and in providing a variety of financial services for local SMEs. Until the end of2010, there were147city commercial banks in China, with total assets of7.8526trillion yuan, after-tax profit of76.98billion yuan, employing as many as206,604people. The status of the city commercial banks in China’s banking industry and financial system has become component and the influence of the city commercial banks in China’s banking industry and financial system has a very significant improvement.From the timing and manner established by the city commercial banks, we can easily see that since its establishment, the city commercial banks have been deeply branded with the marks of the local government. In1995, the Article23of the "Provisional Measures for the Administration of the city commercial banks", clearly states:the shareholders of city commercial banks conclude urban residents, individual industrial and commercial households, local businesses and local governments,in which, the local government is the largest shareholder of city commercial banks, local fiscal stake control in about30%of the total share capital of the city commercial banks, the stake of a single legal entity is not allowed to exceed10%of the total share capital of the city commercial banks, the stake of a single natural person shall not exceed more than2%of the total share capital of the city commercial banks. From the provisions above, we can see that the equity of the city commercial banks have the characteristics of the local government "dominance". After this, the problems with the ownership of the local government of the city commercial banks became the focus of debate.How should we look at the relationship between the city commercial banks and local governments? What factors affect the stake of the local government of the city commercial banks and local government control of city commercial banks? What impacts will the ownership of the local government bring to the credit risk of the city commercial banks?Thus, this study can be epitomized as follows:when local governments face the unfavorable external environment and the targets of performance evaluation can not be achieved, will political achievement demands affect local government’s ownership of city commercial banks or local government’s control of the city commercial banks, and then, leading effects on city commercial banks’lending behavior and increasing the credit risk of city commercial bank? In order to answer these questions in a more effective manner, the author designed a two-level empirical ideas:Firstly, the inspection of the relationship between government political achievement demands and the local government ownership of city commercial banks, focusing on answering whether the political achievements demands will have influence on the degree of control of local government on city commercial banks. Secondly, the examination of the relationship between local government control degree and the local government’s ownership of city commercial banks and the non-performing loan ratio of city commercial banks.Based on the above analysis, this research has put forward the four basic hypothesis:hypothesis1:the less the local finance income, the higher the percentage of city commercial Banks" shares hold by the local government, the stronger the degree of local government control; Hypothesis2:the worse the local economic growth, the higher the percentage of city commercial Banks’shares hold by the local government, the stronger the degree of local government control; Hypothesis3:the higher the unemployment pressure faced by the local government, the greater the higher the percentage of city commercial Banks’ shares hold by the local government, the stronger the degree of local government control; Hypothesis4:the higher the government ownership of city commercial banks (government stake), the higher the non-performing loan ratio of city commercial banks.The paper manually collected79city commercial Banks between2006and2010data as samples, empirically when local governments faced with unfavorable external environment which may lead to the political performance targets will not be able to effectively implemented, political achievement demands will affect local government’s ownership of city commercial Banks and change the degree of local government control on city commercial banks, which in turn lead to influence on the lending behavior of city commercial Banks, then, increasing the credit risk of city commercial banks? This research found that:(1) when in the face of the shortage of the fiscal revenue, the high unemployment pressure and the relatively low local economic growth, the local government usually increase the proportion of city commercial banks" shares hold, insufficient financial income and greater unemployment pressure is as the main factors of the local government ownership of city commercial banks, the lower the local fiscal revenue, the higher the proportion of city commercial banks’ shares local governments hold; the higher the unemployment pressure, the greater the proportion of city commercial banks’ shares local governments hold; the local GDP growth rate also affect the local government’s ownership of city commercial Banks to some extent, but the effect is less obvious than the former two. Last year’s fiscal income and unemployment of the local government also affect the local government’s ownership of city commercial Banks and the last year’s local GDP growth rate will also have effect on the local government’s ownership of city commercial Banks, but its effect were weakened when considering simultaneously with last year’s fiscal income and unemployment for the local government;(2) as the local government ownership of city commercial banks increase, the non-performing loan ratio of city commercial banks will increase, forcing the city commercial bank to take more credit risk. In this paper, research shows that when facing with the shortage of local fiscal revenue, the greater unemployment pressure which will adversely affect the environment of political performance, local governments tend to increase its stake to city commercial Banks, which in turn leads to the non-performing loan ratio of city commercial Banks increase, forcing the city commercial bank to take more credit risk.Based on these conclusions, the paper proposes three policy recommendations:First, improve the functions of the local government, including the reform of local government officials’performance evaluation, promoting the conversion of the functions of the local government, as well as clearly defined the investment field of government; second, improve the financial ecological environment which the city commercial banks relied on, including to broaden the financing channels of the local government, the establishment of the bank’s deposit insurance system, and strengthen supervision and information disclosure efforts; third, limiting the local governments’ proportion of shares to improve the corporate governance structure of the city commercial banks, including the absorption of private corporate enterprises, the introduction of foreign equity, the restructure of city commercial banks.Overall, this study made the following contributions:Firstly, the literature mostly only attach importance to examine the economic consequences of government ownership, however, this research put focus on strengthening the investigation of the background of government ownership, based on the angle of political achievements demands, comprehensively relating the local economic growth rate, fiscal income, unemployment rate and other external macroeconomic variables with the characteristic variables of city commercial banks, to inspect the relationship among the local government ownership of city commercial banks with factors above. In short, the research reveals the causal logic between political achievement demands and government bank ownership, which seek to a very effective breaking point to examine the effects of the enterprise external macroeconomic variables to the microeconomic behavioral characteristics of enterprises mechanisms; Secondly, based on the non-performing loan ratio, this paper measures the extra credit risk the city commercial banks assumed because of the political achievement demands, clearly reveals the "Political Achievement Demands-Ownership of Government-The Credit Risk of City Commercial Bank", one conduction mechanism about the economic consequences of such a government intervention and control of city commercial bank, the study riches the perspective of the current literature; Finally, based on the special institutional background and regional differences of China, take full account of China’s specific national conditions and the difference in various regions of China, the research explores the relationship among, ownership of government and the credit risk of city commercial banks.