Corporate Default Risk and Loan Pricing Behaviour in China

41 Pages Posted: 24 Oct 2017

See all articles by Hongyi Chen

Hongyi Chen

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Jianghui Chen

The Chinese University of Hong Kong (CUHK)

Gaofeng Han

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

Date Written: October 23, 2017

Abstract

This paper studies banks’ loan pricing behaviour in mainland China from 2003-2013 by applying panel regressions to firm-level loan data and estimated default likelihood for listed companies. We find that, with the progress of market-oriented financial reforms, banks generally require compensation for their exposure to borrowers’ default risks. More so if the borrower is a non-state-owned enterprise (non-SOE), mainly due to the pricing behaviour of the Big Four banks. On the other hand, bank lending rates are less sensitive to the default risks of state-owned enterprises (SOEs). Our results also reveal that banks priced in firm default risks before 2008 financial crisis, but not necessarily after the crisis. As for industries, we find that, after the 2008 Global Financial Crisis, the real estate sector and other government-supported industries tended to enjoy better terms on loan pricing in terms of default risks. We believe the main reason is that government stimulus policies tilted towards those industries that played crucial roles in China’s economic growth.

Keywords: Default Risk, Bank Loan Pricing, SOE, Non-SOE, China

JEL Classification: C13, C23, E43

Suggested Citation

Chen, Hongyi and Chen, Jianghui and Han, Gaofeng, Corporate Default Risk and Loan Pricing Behaviour in China (October 23, 2017). Available at SSRN: https://ssrn.com/abstract=3057826 or http://dx.doi.org/10.2139/ssrn.3057826

Hongyi Chen (Contact Author)

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

3 Garden Road, 8th Floor
Hong Kong
China

Jianghui Chen

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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

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