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

24 Pages Posted: 22 Apr 2015 Last revised: 2 Aug 2022

Date Written: April 22, 2015

Abstract

This working paper was written by Wenlang Zhang (CITIC Securities Company Limited), Gaofeng Han (Hong Kong Monetary Authority), Brian Ng (Hong Kong Monetary Authority) and Steven Chan (Hong Kong Monetary Authority).

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

Institute for Monetary and Financial Research, Hong Kong, Corporate Leverage in China: Why Has It Increased Fast in Recent Years and Where Do the Risks Lie? (April 22, 2015). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 10/2015, Available at SSRN: https://ssrn.com/abstract=2597451 or http://dx.doi.org/10.2139/ssrn.2597451

Hong Kong Institute for Monetary and Financial Research (Contact Author)

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