Role of Political Factors in Access to Finance for Small and Medium-Sized Enterprises (SMEs) in China

Abstract

This study investigates the effect of political connections on obtaining formal bank finance among Chinese small and medium-sized enterprises (SMEs). Using the dataset of nearly 750 companies for the period 2004 to 2015, along with various estimators, including the system generalised method-of-moment (GMM), we find strong evidence that political connections can largely help Chinese SMEs to access formal finance from banks. However, such a relationship tends to vary geographically and according to the type of industry that SMEs operate in. We also find that politically connected SMEs were better protected during the recent global financial crisis (GFC). Finally, rural SMEs are still subject to institutional constraints when obtaining bank loans, even in the presence of political connections, because of the centralization of the Chinese banking system. Given SMEs have become the principal driving force of the Chinese economy, this study on the relationship between political connections and SME bank finance fills the current research gap. It also provides meaningful perspectives for understanding the impact of political connections on SME bank finance, which has policy implications for the Chinese public and private decision-makers.