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

Suomen Pankki – Finlands Bank – Bank of Finland June 2013 liquidity crunch in China 2

Suomen Pankki – Finlands Bank – Bank of Finland 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) – non-financial firms, 42 financial firms – 14 % of the firms stated owned  For 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 3

Suomen Pankki – Finlands Bank – Bank of Finland 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 4

Suomen Pankki – Finlands Bank – Bank of Finland 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 (?) 5

Suomen Pankki – Finlands Bank – Bank of Finland 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? 6