Chinese Corporate Debt and Credit Misallocation*

Ninghua Zhong (), Mi Xie () and Zhikuo Liu ()
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Ninghua Zhong: School of Economics and Management Tongji University 1239 Siping Road, Shanghai P.R. China 200092
Mi Xie: School of Economics and Management Tongji University 1239 Siping Road, Shanghai P.R. China, 200092
Zhikuo Liu: China Public Finance Institute & School of Public Economics and Administration Shanghai University of Finance and Economics 777 Guoding Road, Shanghai P.R. China, 200433

Asian Economic Papers, 2019, vol. 18, issue 1, 1-34

Abstract: This paper analyzes various data, especially that of 4 million Chinese manufacturing company samples during the period of 1998 to 2013, to present detailed evidence regarding two questions of China's leverage issue. First, where is the leverage? We find that within the 16-year period, most sample firms have been significantly deleveraged, with the average leverage ratio declining from 65 percent in 1998 to 51 percent in 2013. In contrast, only several thousand companies have significantly leveraged, mostly large-scale, state-owned, listed firms. Second, has the change of leverage been supported by the firms’ fundamentals? We find that for private firms, changes of firm characteristics are consistent with their leverage changes, whereas firm-level factors can hardly explain the leverage of state-owned enterprises. We provide further evidence from aggregate-level data, which suggest that the huge amount of credit being allocated to the state sector is the reason for the declining credit efficiency in China.

Date: 2019
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