The Way of Financial Decentralization Influencing Private-Owned Enterprises’ Financial Constraints: A Supplementary Discussion

Abstract

During China’s ongoing phase of industrial upgrading, state-owned enterprises (SOEs) continue to play a dominant role in capital-intensive industrial transformations. Private-owned enterprises (POEs) face credit constraints influenced by both squeeze-in and squeeze-out effects, with the extent of financial constraints determined by the dominant entity. A crucial factor in this dynamic is financial decentralization (FD).

Macroscopically, FD does alleviate financial constraints for POEs, but its effectiveness is contingent on the pace of industrial upgrading. The specific approaches to FD implementation and their impact on POEs’ financial constraints are key considerations. China’s credit market exhibits a stratification by ownership type. Large state-owned commercial banks cater to the financing needs of centralized enterprises, local government-controlled banks support local SOEs, and privately-controlled banks primarily finance POEs. Establishing district banks can be viewed as a decentralization strategy, with FD-I involving decentralization from central to local levels and FD-II reflecting a decentralization strategy from local government to the market. This study poses specific research questions: Does the establishment of district banks enhance POEs’ credit access, and does a shift in district banks’ control structure significantly ease the financial constraints of POEs?

Drawing data from various sources, this study conducts empirical tests from both the firms’ and banking perspectives. Analysis of credit ratios among SME-listed POEs reveals that the development of district banks improves credit ratios, with joint-stock banks (JSBs) having a more significant impact in developed regions, and city commercial banks (CCBs) being more prominent in economically underdeveloped areas. Cash-cash flow sensitivity testing indicates that increased decentralization among district banks effectively eases financial constraints of POEs. Additionally, the exit of local government promotes CCBs to lend to POEs. Furthermore, in developed regions experiencing rapid industrial upgrading, a judicious government exit proves adequate. Conversely, in economically underdeveloped areas, a more substantial government exit becomes imperative.

This implies that effectively addressing the financial constraints of POEs requires not only optimal industrial upgrading but also a robust implementation of FD. This finding holds considerable reference value for local governments aiming to support SMEs through district banks. These efforts should account for local industrial planning, consider the industrial positioning of both SOEs and POEs, and establish a locally adapted division of control within the banks while appropriately decentralizing to the market.

This research underscores the impact of FD on POEs’ financial constraints through three methods: the “scale way”, involving the establishment of local financial institutions to increase local financial resources (FD-I); the “control way”, reallocating financial resources and control to the market by reducing local government influence (FD-II); and the “industrial way”, where SOEs actively guide industrial upgrading, exit industries where POEs have competitive advantages, and enhance POEs’ financing ability.