The Chinese government established the Act on Commercial Banks 1995 to enforce and regulate commercial banking activities. The government envisaged that the Act, together with other bank reforms, would improve credit risk management practice among commercial banks, and hence the banks would reduce and ultimately stop local government directed policy lending to state-owned enterprises (SOEs). This paper examines the lending behavior of a governmentcontrolled commercial bank before and after the passage of the Act. We find that the bank tightened control of the credit risk of borrowers after the passage of the Act. We also find that SOEs are charged a rate of interest higher than that charged to private firms.

Preprint of an article submitted for consideration in Review of Pacific Basin Financial Markets and Policies (RPBFMP) © 2011 copyright World Scientific Publishing Company http://www.worldscinet.com/rpbfmp/14/1403/S02190915111403.html