How do state-owned enterprises influence banking regulation in China?

Abstract

Proceeding from the differences in local financial regulation in China, this study explores the mechanism of how state-owned enterprises (SOEs) affect the intensity of banking regulation. After reviewing the evolution of Chinese and foreign financial regulation models and multi-positioning of SOEs in China’s economic development, this paper proposes three possible mechanisms: fiscal dependence, soft budget constraints and political symbiosis. Specifically, SOEs’ contribution to local fiscal revenue and its importance in stabilizing employment and social order may lead local governments to give more lenient treatment to SOEs in banking regulation; the government’s “backing” to SOEs and the banks’ lower risk control requirements for their loans jointly form a “soft budget restraint”; and the “revolving door” between SOE leaders and local officials and bank executives weakens the independence of regulation through political connection. In order to quantify the intensity of banking regulation, natural language processing and intensive learning techniques were used to score the text of financial penalty announcements in various provinces from 2009 to 2022, thereby constructing the banking regulation intensity index (BRIH). The analysis results show that in regions where there are more SOEs and higher local governments’ financial dependence on them, banking regulation and penalties are generally looser, which is also strengthened by political symbiosis and soft budget constraints. Although data limitations and changes in the external environment have a certain impact on the results, the rationality of the above mechanism is still proved through alternative variables and case study. The research conclusions provide a new perspective for understanding China’s local regulatory differences under the framework of a unified policy, as well as a reference for improving the reform of SOEs and enhancing the independence of local financial regulation.