Corporate Leverage in China: Why Has It Increased Fast in Recent Years and Where Do the Risks Lie?

HKIMR Working Paper No.10/2015

24 Pages Posted: 22 Apr 2015

See all articles by Wenlang Zhang

Wenlang Zhang

Independent

Gaofeng Han

Hong Kong Monetary Authority; University of California, Santa Cruz - Department of Economics

Brian Ng

Hong Kong Monetary Authority

Steven Wai-Wah Chan

Hong Kong Monetary Authority

Date Written: April 22, 2015

Abstract

Our analysis based on firm-level data indicates that China’s corporate sector does not appear to be over-leveraged in aggregate despite rapid credit growth following the global financial crisis. However, some industries, particularly real estate developers and firms in industries with substantial over-capacity, have continued to increase leverage. By ownership, it is mainly state-owned enterprises (SOEs) that have increased leverage, while private enterprises have deleveraged in recent years. Using a corporate finance model, our research shows that SOEs’ leveraging has been mainly driven by implicit government support amid lower funding costs than private enterprises. If SOEs, particularly the real estate developers and firms in overcapacity industries, had borrowed without such support, their leverage would have been much lower. Moreover, some SOEs did not use credit obtained via formal financing channels to expand their businesses, but instead conducted credit intermediation.

Leveraging driven by government support has resulted in a weakening in fund-use efficiency and a deterioration in corporate debt-servicing capacity. Meanwhile, non-financial corporate credit intermediation activities not only add risks to banks’ asset quality but also mislead policy makers. Specifically, headline figures of credit expansion would overstate credit allocated to the real economy and understate credit allocated to the financial sector. Our analysis suggests that, if corporate credit intermediation activities are taken into account, the credit intermediation chain would be longer than indicated by the headline figures. This also suggests quantity indicators, such as credit growth, may have become less informative of China’s monetary conditions.

Suggested Citation

Zhang, Wenlang and Han, Gaofeng and Ng, Brian and Chan, Steven Wai-Wah, Corporate Leverage in China: Why Has It Increased Fast in Recent Years and Where Do the Risks Lie? (April 22, 2015). HKIMR Working Paper No.10/2015, Available at SSRN: https://ssrn.com/abstract=2597451 or http://dx.doi.org/10.2139/ssrn.2597451

Gaofeng Han

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

University of California, Santa Cruz - Department of Economics ( email )

Santa Cruz, CA 95064
United States

Brian Ng

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Steven Wai-Wah Chan

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

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