Bank Deregulation, Financial Constraints, and the Decline in Labour Share: Evidence From China

ABSTRACT This study investigates the impact of bank deregulation on the labour share of income in China. In 2009, the Chinese government substantially reduced market entry barriers for joint‐stock and urban commercial banks, triggering a wave of expansion among small‐ and medium‐sized bank branches. Using firm‐level data from 2000 to 2013 and the stacked difference‐in‐differences approach, we find that bank deregulation significantly reduces firms' labour shares. The effect is more pronounced in industries with greater dependence on external financing, as well as among nonstate‐owned enterprises and small and medium‐sized firms. Mechanism analysis suggests that expanded branch entry alleviates firms' financial constraints, leading to increased asset investment, which crowds out wage payments because of limited internal liquidity. The entry of banks also reshapes industrial composition by attracting more capital‐intensive firms. These findings highlight that credit market reforms may be important yet underexplored contributors to the decline in labour share in developing economies.