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Target Setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks

We study the consequences of month-end lending incentives for Chinese bank managers. Using data from two banks, one state-owned and the other partially privatized, we show a clear increase in lending in the final days of each month, resulting from both more loan issuance and higher value per loan. We estimate that daily lending is 92 percent higher in the last 5 days of each month as a result of loan targets, with only a small amount plausibly attributable to shifting loans forward from the following month. End-of-month loans are 1.6 percentage points (12 percent) more likely to be classified as bad in the years following issuance relative to mid-month loans. Our work highlights the distortionary effects of target-setting on capital allocation, in a context in which such concerns have risen to particular prominence in recent years.