The Siamese twins: Do state-owned banks favor state-owned enterprises in China?

Using city-level data over 1989-1991, we find relatively clear evidence that China's bank loans favor state-owned industrial enterprises. Using a simple model, we argue that the lending bias diminishes the effectiveness of other measures designed to promote the growth of non-state sectors or to induce SOEs to restructure. A policy implication of the study is that the reform of the banking sector, in particular, its lending policy should be implemented simultaneously with the reforms of state-owned industrial enterprises.