CDEP-CGEG WORKING PAPER NO. 66

Zombie Firms and Political Influence on Bank Lending in China

Qiuying Qu

Abstract:

Zombie firms—indebted firms that are unprofitable and depend on banks or government bailouts for continued operation—are a drag on the economies in which they operate. The existence of zombie firms has been attributed to banks continuing to provide forbearance lending for their own interests. But local political officials may also contribute to keeping zombie firms alive, even in settings without the pressures of electoral cycles. Studying loans in China, I examine how bank lending is influenced by local officials and tracks their appointment cycle. I find that there is significant targeting of firms: lending to zombie firms increases in the last service year of local officials and exhibits an increasing trend across the appointment cycle, while lending to non-zombie firms shrinks in the last service year and decreases across the cycle. I also find that influence is selective: local officials pressure small local banks more to lend to unprofitable firms, but their ability to affect large nationally operated banks appears to be limited.

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