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Ding Chen

, 2007). In order to survive these SCBs (and indirectly SOEs), the official deposit interest rate has long been maintained at such a low level that the real interest rate was sometimes negative (Wu, 2005). As will be shown in the next chapter, the low interest rate and the lack of alternative investment channels are partially accountable for retail investors’ excessive speculation in the stock market. Fourth, the weak internal control of banks often led to a large amount of bank lending shifting into the stock market, which became a major financing source of market

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Ding Chen

This important new book attempts to establish a fresh conceptual framework for the study of corporate governance by employing the new institutional economics of contract enforcement. This framework helps to clarify two critical issues including the role of law in financial development and whether there is an optimal corporate governance model that should be followed by countries attempting to develop their own stock markets.
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Ding Chen

. 164). The main purpose of the debt-equity conversion was to convert interest payments of the debtor enterprises into profits on the books and therefore put the loss-making enterprises in the black – in essence, the government subsidized these selected SOEs (Wu, 2005, p. 164). Other measures include increasing bankruptcy and mergers, subsidized interest rates, tax refunds, increasing investment in technical upgrading 18 On 18–24 July, 1997, the then Premier Zhu Rongji pledged to get large and medium SOEs that were in the red out of trouble in about 3 years during

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Theoretical framework

The Chinese Experience

Ding Chen

under arm’s-length lending (Diamond, 1984). Relying on the long-term relationship, these banks can effectively protect themselves from opportunistic behaviour of the firm. However, there is a dark side of relational banking. For one thing, it might cause opportunism on the bank’s side so as to fail to relieve borrowers’ credit constraints. Weinstein and Yafeh (1994) find that Japanese firms with main banks pay higher average interest rates on their liabilities than do unaffiliated firms after controlling other factors. Hoshi, Kashyap and Scharfstein (1993) find that