| Abstract | Financing for urban infrastructure projects and the appearance of metropolitan investment corporations is one of the most important economic phenomena in the last two decades in China. And, main finance sources of the local financing platforms, which are mainly consisted of the investment corporations, come from the state-owned commercial banks. This paper provides a proof about the justification for the dependence of the local governments’ financing platform on the loan from the state-owned commercial banks. Within the framework by Diamond-Dybvig (1983), we studied how the efficiency of resource allocation could be improved by the dependence of local financing platforms on the state-owned commercial banks. The mechanism of improving the efficiency of resource allocation is as following: by a rising of the ratio of banking loan financing to public debt financing, the price of debt could be increased , then the proportion of the investments in short asset and financing asset would be reduced, and the proportion of investment in long asset and real urban infrastructure asset would be increased, hence, the efficiency of recourse allocation could be improved. Our research finds out that, the role of the local governments’ financing platforms in improving resource allocation is closely connected with the imperfectness of finance markets in China. Therefore, it should be careful about all opinions and suggestions to push the financing liberalization ahead of the whole process of urbanization in china. |