Maturities and Lending Rates of Entrusted Loans. Each loan transaction is uniquely determined by a quadruple index s = (t, i, b, j), where t represents the year in which the transaction takes place, i the loan recipient (borrower or borrowing firm), b the bank or nonbank trustee that facilitates the loan, and j the loan originator (lender or lending firm). The loan amount is thus denoted bySs.11 Since the risky characteristic concerns borrowers only, the characteristics related to j (lending firms) are not the subject of this paper and thus left to the residuals of our various regressions. As a first step, we run the following regression: ss = α + αt + αmms + αrI (Riskyi) + εs, (2.1) where ss is the interest rate spread between the loan rate and the 7-day CHIBOR rate (measuring the degree of riskiness of each loan), m is the loan maturity, αt controls for the time fixed effect, and I (Riskyi) returns 1 if the borrower is in the 11For our transaction-based data, it is not uncommon that a borrower utilizes an entrusted loan only once for the whole sample or that a borrower utilizes two or more entrusted loans in a distant interval of many years. risky industry and 0 otherwise. The control variable vector αt includes gt−1 (annual change in M2 from the end of t − 2 and the end of t − 1), GDPt−1, (annual change in GDP from the end of t − 2 and the end of t − 1), and Inft−1 (annual change in the general price level from the end of t − 2 and the end of t − 1). The GDP measure is real GDP measured by value added. The inflation series is the GDP deflator; we have experimented with other inflation series as in Nakamura et al. (2014) and Xxxxx et al. (2016) but with almost identical results for all our empirical findings. After controlling for loan maturities (αmms), the coefficient αr reflects the interest rate spread between risky and non-risky lending rates.12 According to the estimates reported in Table 2.4, additional one-year maturity reduces the lending rate spread over the 7-day CHIBOR rate by 46 basis points. After we control for maturities, the spread between risky and non-risky lending rates is 1.28% annually. The significantly estimated coefficient, αm, indicates that the longer the maturity is, the less risky entrusted lending is. This is a unique feature of Chinese entrusted loans that underlies our theoretical model’s assumption that risky assets have a shorter duration than safe loans.
