The impact of foreign bank deregulation on firm performance: evidence from China

Abstract This paper examines the impact of foreign bank entry on domestic firms' credit access and real economic outcomes, leveraging the staggered implementation of deregulation policies in China from 2001 to 2006. These policies allow foreign banks to gradually enter the Chinese banking market, creating differential access to foreign credit across cities. Using a comprehensive firm‐level dataset from the Chinese Manufacturing Census, we find that privately owned enterprises obtain significantly more bank loans and exhibit higher growth in sales and investment compared to their state‐owned counterparts. The benefits of foreign bank entry are most pronounced for firms that are young, small and more financially constrained. Increased competition and bank technology transfer are identified as the key channels driving these effects. Overall, our findings provide robust evidence that policy‐driven foreign credit supply shocks mitigate financing constraints and improve economic outcomes for private enterprises compared to state‐owned firms.