Fiscal Decentralization, Government Intervention and Capital Allocation

On the basis of listed companies' data between 2001 and 2007, this paper investigates the influences of fiscal decentralization and government intervention on capital allocation. We find that in regions with less adequate fiscal decentralization or smaller increasing rates of GDP and fiscal revenues, the local governments intervene more on the capital allocation of banks, and the local government-owned companies and private companies in those areas can more easily get long-term debts from banks. Our conclusions show that one critical factor influencing China's bank capital allocation is the promotion incentive mechanism for local officials characterized by fiscal decentralization and performance measured by GDP growth.