Using proprietary loan-level data and detailed bank branch data in China, this paper investigates the effects of the 2009 bank branch deregulation on competition dynamics between new and incumbent banks and on real economic activities. Tracing out each of the loans firms borrowed, we find that new entrant banks target mostly the firms borrowing from incumbent banks. After deregulation, new-entry banks tend to lend significantly more to SOEs or relationship borrowers. Loans from new-entry banks have longer maturity, better internal ratings, more third party guarantees, and lower delinquency rates. When competition pressure is higher, incumbent banks lower loan-screening standards and have higher delinquency rates. Although bank entry deregulation make credit allocation worse, it has significantly positive effects on firms with bank credit access. Increased interbank competition leads to decreases in interest rates and increases in firm investments, employments, sales, and efficiency, especially for private firms.

Keywords: Bank Competition; China; Credit Allocation; Growth; Efficiency