The Aftermath of Corporate Default with Chinese Characteristics

Abstract

We study the consequences of corporate default using China’s national credit registry. Borrowing after default declines if the lender or borrower is not state-controlled or if the borrower is located in a highly developed province. After default, a key social indicator, employment, does not increase except for state-controlled firms. A new bankruptcy law that increases creditor rights but reduces protection for employees is associated with lower post-default borrowing and employment. In contrast, state-controlled firms borrow more post-default under a government initiative intended to reduce bureaucratic interference in the economy. Our evidence highlights trade-offs between political, commercial, and social goals faced by bankers and policymakers.

Keywords: bank loans, corporate default, default resolution, China, state-owned enterprises, government controlled banks

JEL Classification: G21, G28, G33, G38