Are China's Financial Reforms Leaving the Poor Behind - Harvard ...

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decisions that increase branch profitability. Unconstrained autonomy however can leadto moral hazard problems that might undermine banking profitability and efficiency. Weexpect better governance, in turn, to translate into a lower percentage of non-performingloans.Simple descriptive statistics on all of the governance-related variables aresummarized in Table 9, which breaks the data down by income quartiles of thetownships. We report both levels in 1997 and changes between 1994 and 1997. Themuch larger sample size for the former reflects the more complete information we havefor 1997. 14In some important respects, poor areas appear to be handicapped by poorerinstitutional practices. The size of loans that can be approved is much lower than in therichest areas, collateral requirements and reporting requirements are more lax, andgovernment influence on lending is higher. However, there are other aspects that favorpoor areas. Bonus incentives are stronger, perhaps reflecting budgetary shortages, andthe time it takes to complete lawsuits is shorter, perhaps because there are fewer casesbacklogging the system given lower levels of economic activity. In general, changes ingovernance variables is occurring more rapidly in richer areas compared to poorer areas,suggesting that reform is lagging in remote areas.Table 10 reports the results of OLS regressions analyzing the percentage of nonperformingloans in 1997 as a function of bank governance in 1997, and the change innon-performing loans between 1994 and 1997 as a function of governance structurespresent in 1994. We recognize the multiple endogeneity problems associated withrelating institutional change and economic performance, so treat the relationships more as14 Frequent managerial turnover in the bank branches handicapped our efforts to obtain information for1994.26
correlations rather than making causal inferences. Columns 5-8 of Table 10 report theresults linking non-performing loans in 1997 to bank governance. In each of theregressions, we also include township per capita income as an additional control variable.For comparison, column 5 reports the results of the bivariate regression of nonperformingloans on income. 15The regressions are nicely suggestive of the role ofgovernance. We find that the percentage of non-performing loans is negatively correlatedwith branch manager bonus incentives, the use of collateral, freedom from governmentpressure, and authorization limits (insignificantly), and positively correlated with thelength of time required to resolve cases legally. The percentage of non-performing loansis also significantly lower in higher income areas. This may be picking up overall higherloan quality, and possibly unobserved dimensions of local governance structures that arecorrelated with incomes.In column 7, we include as an additional explanatory variable the interactionbetween loan authorization limits and managerial bonus incentives. As in column 6, theindividual coefficients on these two variables remain negative, and now are significant at5 percent. The positive coefficient on the interaction term, however, suggests that acombination of high authorization limits and powerful incentives contributes to aweakening of the quality of the loan portfolio. One interpretation for this result is that thecombination leads to excessive risk-taking on the part of branch managers that ultimatelylead to an increase in the percentage of non-performing loans. It also suggests the needfor higher authorities to properly balance incentives and rights. In column 8 we include asan additional regressor information on quarterly reporting requirements of the bank15 The results are robust to including provincial fixed effects, controlling for branch type, and to excludingthe income variable.27
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Page 16 and 17: We find that from 1994 to 1997 the
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Page 37 and 38: Table 2Financial Intermediation Ind
Page 39 and 40: Table 4Loan-Deposit Ratios, 1994 an
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Page 43 and 44: Table 9Governance by Income Quartil
Page 45 and 46: Table 11Changes in Governance betwe

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