The value of relationship banking:
Evidence from interbank
liquidity crunch in China
by Yiyi Bai, Qing He & Liping Lu
Riikka Nuutilainen, BOFIT, Bank of Finland
Conference on China’s Financial Intermediation
October 8, 2015​, City University of Hong Kong
1
June 2013 liquidity crunch in China
14
%
12
Shibor 7D
Shibor overnight
Deposit ref. rate 1Y
Credit ref. rate 1Y
10
8
6
Shanghai Composite Index
4
2
0
3500 2010
2011
2012
2013
2014
Shanghai Composite Index
2012
2013
3000
2500
Source: Macrobond.
2000
1500
2010
2011
Suomen Pankki – Finlands Bank – Bank of Finland
2014
2
Data
 Event study of how firms lending relationship with
banks affect their stock market reactions during the
liquidity crunch
 All firms traded in Shanghai and Shenzhen stock
markets (with sufficient data available)
– 2 313 non-financial firms, 42 financial firms
– 14 % of the firms stated owned
 For 1 021 of the firms loan information available
– 87% borrow the largest proportion of long-term loans from a bank
(total of 87 different banks)
– Of which; 48% of firms borrow from the Big 4 banks,
9% of firms from 29 local banks
43% of firms from 54 regional banks
– 13% borrow from a non-bank institution
Suomen Pankki – Finlands Bank – Bank of Finland
3
Main findings
 Firm-bank relationships, in general
– Smaller drop in returns if largest lender is a bank
– And even smaller if largest lender is a Big 4 bank (though not
always significant)
– Bigger drop in returns if lender is a local bank, and still in almost
all cases the drop larger than when the lender is not a bank at all
 Firms lending from the small banks are the worst off
 Firm-bank stock response relations
– Firms returns correlate positively with their largest lender bank’s
returns in the case of Big 4 and local banks
 Firm return-bank market liquidity relations
– Higher interbank market liquidity of the largest lender positively
correlated with firms’ returns in the case of Big 4 banks
Suomen Pankki – Finlands Bank – Bank of Finland
4
Few comments..
 Data covers all listed companies in China
 Many smaller companies have low market liquidity
– Firm control variables: size (total assets), leverage, EBIT,
Tobin’s q & state-owned dummy
– Finding: state-owned companies perform the worst
 Big state banks in China generally net suppliers of
funds in the interbank market and the smaller banks
net borrowers
– Finding that the Big 4 as the largest lender affect firms’ returns
positively due to their liquidity in the interbank market.
– When taking the interbank liquidity into account, the coefficient for
Big 4 negative (even within Big 4 higher liquidity positive)
 But interbank liquidity in general has negative effects on returns
(?)
Suomen Pankki – Finlands Bank – Bank of Finland
5
Few comments…
 Positive correlation between firm and bank returns
only for Big 4 and local banks, but negative for others
(?)
 For local banks
– Positive correlation between firm and bank returns may depend on
the region they are located in
– Firms/banks in some province less affected by the liquidity
squeeze?
Suomen Pankki – Finlands Bank – Bank of Finland
6