The Impact of the Interest Rate Liberalization on Both Banks and Small Firms: Evidence from China

Abstract

More and more commercial banks have developed their business with small firms rapidly in China since the interest rate liberation reform in 1996. Many scholars have investigated how the rate liberalization influences the risk taking behaviors of banks. Meanwhile, some researchers have exploded from another perspective that how the reform would affect the firms especially its financing business. However, few of them have put two of the effects together under one shared model to find out how the liberalization affect both of the suppliers and buyers in this financial market. Thus, this article makes an empirical analysis on the issue above by using the data of five biggest commercial banks in China from 2004 to 2015, trying to find out the interactive effect it has on both of the market players. We put a multiplication factor into the analysis model and use GMM regression method. The results show that under the situation of interest rate liberalization, the bank loans of small firms will not be exposed under great non-performing risks. On the contrary, this will encourage more banks to develop business with small firms, which could be viewed as a win-win result.