Bank Lending Channel In China

With the financial reform and interest rate liberalization, commercial banks in China are facing much more fierce competition. The changes in the competition situation of banking industry are bound to affect bank’s business behaviors. From this perspective, this paper studies the competition situation of banking industry and the bank lending channel. Firstly, it applies Panzar-Rosse model to estimate the degree of bank competition on behalf of index H. Then, this paper uses panel data of China’s banking industry from 2005 to 2012 to estimate how bank competition affects monetary policy through bank lending channel, utilizing a fixed effect model and dynamic panel GMM method. The main conclusions of this paper are as follows.First, the banking industry of China is under monopolistic competitive environment and after 2009 banks are facing increasing competition pressure. Second, the impact of monetary policy through bank lending channel on credit market is efficient. Three tools of monetary policy, as open market operation, statutory deposit principal and interest rate policy, all have significant impacts on the lending behaviors of banks. Third, the increasingly fierce competition faced by banks in China will weaken the effectiveness of the bank lending mechanism. As competition among banks intensifies, information asymmetry in credit markets reduces, mergers and acquisitions among banks increase, and banks traditional business model changes. These impacts will reduce the sensitivity of bank’s responses to monetary policy. Forth, bank capital plays a significant role of promoting bank loans. The more adequate capital a bank has, the more room it has for loans.In the end, this paper puts forward several policy recommendations, like steadily financial reform, prudential regulation, changing bank operation behaviors and differentiated management of monetary policy.