Debt Crisis in China?
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- Jemimah Bryan
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1 Debt Crisis in China? Yi Huang Assistant Professor of Economics Pictet Chair in Finance and Development The Graduate Institute, Geneva EUInomics workshop, European University Institute April 29, 2016
2 Motivation: Growth slowdown and debt rising Source: Buttiglione L, P Lane, L Reichlin and V Reinhart (2014)
3 Motivation: Financial Repression and Local Government Debt Source: Yi Huang, Marco Pagano and Ugo Panizza (2015)
4 Motivation: Misallocation between State-Owned and private firms Source: Jianjun Miao, Pengfei Wang and Yi Huang (2015)
5 Motivation: Retail Investors and Securities Margin Trading Stock price and Securities Margin Trading Source: Matthias Efing and Yi Huang (2016)
6 Chinese Story of Dollar Bond Issuance Global dollar liquidity and domestic financial conditions are associated with the magnitude of carry, the yield from interest rate differential adjusted for expectations of RMB-Dollar exchange rate change. Profitable carry is an incentive for the dollar bond issuance by lemon firms with international capital market access. Real and financial effects of dollar bond issuances: sizable US dollar-denominated borrowing without hedging and financial intermediation (lending) activities.
7 Stylized fact Chinese Firms Bond Outstanding by Currency Source: Richard Portes and Yi Huang (2016)
8 Stylized fact Foreign Currency Bond Outstanding After 2009, due to the new regulation, Chinese enterprises have been forbidden from purchasing any FX derivatives in order to maintain financial stability.
9 Bond Issuers: non- tradable sector, overcapacity industries, lemon... Top 10 Industries of Bond Issuance (billion USD) Industry Total Amount Percentage Construction/Building Utility & Energy Oil & Gas Real Estate/Property Transportation Mining Metal & Steel Holding Companies Computers & Electronics Chemicals Over-capacity industries refer to Iron, Cement, Flat Glass, Aluminium, Ship-buildings, Construction/Building and Real Estate/Property.
10 USD Bond Issuers: non- tradable sector, overcapacity industries, lemon... Top 10 Industries of Dollar Bond Issuance (billion USD) Industry Total Amount Percentage Oil & Gas Real Estate/Property Computers & Electronics Utility & Energy Metal & Steel Transportation Construction/Building Chemicals Mining Food & Beverage Over-capacity industries refer to Iron, Cement, Flat Glass, Aluminium, Ship-buildings, Construction/Building and Real Estate/Property.
11 Monetary Policy and Over-capacity Industries USD bonds outstanding by industry After 2009, according to the new/tight monetary policy, commercial banks in China have been discouraged to lend to the over-capacity industries and they consequently issue dollar bonds abroad.
12 Outstanding USD Bond and FX Risk Exposure USD Bond Outstanding and Exchange Rate After 2009, due to the new regulation, Chinese enterprises have been forbidden from purchasing any FX derivatives in order to maintain financial stability.
13 Main Findings Using international bond issuance data from all Chinese nonfinancial firms, we find that by 2015 there was more than 475 billion of US dollar dominated debt outstanding. Most of the outstanding dollar debt without hedging. There is a positive correlation between inter-firm loans and dollar bond issuance, which indicates the role of financial intermediation between financial assets and liabilities predicted by Shin and Zhao(2013) and Bruno and Shin(2015). Firms with lower value, weaker performance, corporate governance and no foreign cash flow tend to increase inter-firm lending when they issue dollar bonds- a form of financial intermediation. Private firms and over-capacity industries tend to increase inter-firm lending when they issue dollar bonds.
14 Conclusion and Policy Implication Firms in a financially repressed environment (such as China) use international bond issuances to raise funds......but this is a risky game. Chinese firms that issuing dollar bonds which are characterised by lower value, weaker performance, corporate governance and without foreign exposure tend to have more financial intermediation activities. They also tend to extend more (inter-firm) loans, sparking potentially inefficient credit growth and introducing financial fragilities. Reconsider the real and financial effects of dollar bond issuances while encouraging domestic financial market development.
15 Discussion Thank You
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