Liberalization of Regulated Interest Rate, Efficiency of Bank Credit Risk-Pricing and Financing Constraints for Private Enterprises in China

This study investigates how China’s interest rate liberalization—with a focus on the often-overlooked dimension of bank credit risk pricing efficiency—impacts the financing constraints of private enterprises. We employ the investment-cash flow sensitivity (ICF) as a dual measure that captures both difficult and costly access to financing, extending its conventional application which has largely centered on the latter. Our analysis finds that private enterprises generally face notable financing constraints and that interest rate liberalization exerts a substantial effect in alleviating such constraints. Further heterogeneity tests, using a multi-level progressive analytical approach, reveal that specific firm-type characteristics (small scale, high growth, high leverage) and their interactive effects are pivotal to the significant alleviation of financing constraints, with the role of high growth being the most robust and critical. This article concludes by proposing two policy implications: improving bank credit risk pricing efficiency and implementing differentiated financing support measures.