Political Connections and Corporate Borrowing: an Analysis on the Listed Real Estate Firms in China

This paper investigates the relationship between political connections and corporate borrowing behaviour using the listed real estate development firms in China from 2001 to 2014. Evidence from China is of particular importance due to China being the world’s largest emerging and transition economy. We find that the benefit of political connections is manifested in firms obtaining loans from state-controlled banks in the first instance, but that political influence diminishes over subsequent loan extensions. The performance based requirement prevents banks providing systemic favourable treatment to the connected real estate firms, especially after the Chinese banking system reform in 2006. The results provide fresh insight on the risks and benefits of political connections in the Chinese real estate market as it transitions from a centrally planned to a market based economy under on-going market oriented banking and political reforms.