The China Syndrome Affects Banks: The Credit Supply Channel of Foreign Import Competition

Sergio Mayordomo and Omar Rachedi

Did the rise of Chinese import competition in the early 2000s affect banks’ credit supply policies? Using bank-firm-level data on the universe of Spanish corporate loans, we find that banks rebalanced their loan portfolios away from firms facing Chinese import competition and towards profitable firms in non-exposed sectors. Banks supplied more credit also to the construction sector, yet independently of firms’ profitability. This is not due to banks’ exposure to the housing boom. Rather, the high geographical concentration of the manufacturing industries competing with China left local banks with fewer alternatives to local construction firms for rebalancing their loan portfolios.