Foreign banks and firms export dynamics: Evidence from China's banking reform

Abstract

This paper investigates how banking integration affects export dynamics. To estimate the causal link, we exploit the phased liberalization of the Chinese banking industry to foreign competition across cities, based on WTO accession commitments, and use transaction-level data for all Chinese exporters. Following deregulation of foreign banks’ local-currency business, the increased local presence of foreign banks from the importing country raises export entry, the number of products, and initial sales to the same country for firms in the city but has no effect on exit or growth. The effects are significantly more pronounced for more distant countries, for firms in industries with less collateralizable assets, and those exporting differentiated goods. The results uncover particular channels for banking integration to facilitate exports and are consistent with foreign banks’ informational advantage in screening export projects, relying less on collateral for their lending decisions, and in reducing uncertainty for firms exporting to the banks’ country.