How loan interest rate liberalization affects firms’ loan maturity structure : Evidence from listed manufacturing companies in China

Abstract

Purpose

After loan interest rate upper limit deregulation in October 2004, the financing environment in China changed dramatically, and the banks were eligible for risk compensation. The purpose of this paper is to focus on the influence of the loan interest rate liberalization on firms’ loan maturity structure.

Design/methodology/approach

Based on Rajan's (1992) model, the authors constructed a trade-off model of how the banks choose long-term and short-term loans scales, and further analyzed banks’ loan term decisions under the loan interest rate upper limit deregulation or collateral cases. Then the authors used an unbalanced panel data set of 586 Chinese listed manufacturing companies and 9,376 observations during the period 1996-2011 to testify the theoretical conclusion. Furthermore, the authors studied the effect on firms with different characteristics of ownership or scale.

Findings

The results show that the loan interest rate liberalization significantly decreases the private companies’ reliance on short-term loans and increases sensitivity to interest rates of state-owned companies’ long-term loans. But the results also show that the companies’ ownership still plays a key role on the long-term loans availability. When monetary policy tightened, small companies still have to borrow short-term loans for long-term purposes. As the bank industry is still dominated by state-owned banks and the deposit interest rate has upper limits, the effect of the loan interest rate liberalization on easing long-term credit constraints is limited.

Originality/value

From a new perspective, the content and findings of this paper contribute to the study of the effect of the interest rate liberalization on China economy.

Citation

Zhou, J., Wang, J. and Ding, J. (2014), "How loan interest rate liberalization affects firms’ loan maturity structure : Evidence from listed manufacturing companies in China", China Finance Review International, Vol. 4 No. 2, pp. 153-167. https://doi.org/10.1108/CFRI-06-2013-0078