Political connections, finance and growth: The role of party leadership positions

Abstract

A number of recent papers have documented that firms receive preferential treatments because of their political connections. In this paper, I study whether politically connected firms have received preferential treatment in bank financing and the impact of that on economic growth. Using a firm-level survey data of Chinese firms, I find that private firms with Party-leader General Managers are more likely to access bank loans, although there is little evidence that they get better loan terms regarding collateral requirements. Party membership alone does not induce favors from banks. On the other hand, General Managers' involvement in the Party does not affect access to bank loans for SOEs. The positive relationship between political connections and bank loans for private firms also shows geographical differences in magnitude although qualitatively similar. The paper also provides suggestive evidence that bank credit extended to non-connected private firms has positive effects on GDP growth.