Debt Risks Prevention and Corporate Bond Issuance Divergence
DENG Wei, XIA Hanjing, LIU Chong
School of Accounting and Finance, Zhongnan University of Economics and Law; Hubei Provincial Academy of Healthcare Security Reform and Development; School of Finance,Shanghai University of Finance and Economics; Shanghai Institute of International Finance and Economics
Summary:
Preventing risks is a permanent theme in China's financial work. In particular, financial risk prevention and control must emphasize debt risk management, as debt risk is contagious and prone to triggering chain reactions, which would increase the likelihood of financial crises and give rise to systemic financial risks. As a pivotal component of China's capital markets, the bond market has assumed an increasingly critical role in debt risk containment. As the world's second-largest bond market, it serves as an irreplaceable institutional mechanism for advancing direct financing ratios, achieving leverage stabilization, and enhancing capital market efficiency. Consequently, investigating how debt risk mitigation frameworks influence corporate bond issuance dynamics and elucidating their transmission mechanisms hold profound implications for reconciling leverage stabilization objectives with systemic risk prevention. The marginal academic contributions and key findings of this study are summarized as follows. Firstly, we examine the impact of the deleveraging policy on corporate bond issuance, revealing the divergence phenomenon in bond issuance between POEs and SOEs, which enriches the research on the economic consequences of the deleveraging policy. We find that the deleveraging policy significantly reduced the scale of bond issuance by POEs relative to SOEs, thereby exacerbating the bond issuance divergence between POEs and SOEs. Despite the increase in trade credit financing, which plays the role of alternative financing, for both SOEs and POEs, the deleveraging policy ultimately leads to a significant reduction in the scale of investment by both POEs and SOEs. Secondly, we identify the mechanism of the effect of the deleveraging policy on the divergence of corporate bond issuance. This paper finds that, as a policy targeting SOEs, the deleveraging policy led commercial banks to significantly reduce lending to SOEs, thereby reducing the amount of bank loan financing for SOEs, which stimulated SOEs to increase bond issuance in the bond market to meet the capital gap. On the commercial banks side, they prefer to buy bonds issued by SOEs rather than POEs since the default risk of the latter is much bigger. Moreover, the deleveraging policy reinforced the default risk of bonds issued by POEs and raised issuance costs, thereby reducing the need for POEs to issue bonds. Our research provides important insights for corporate financing as well as the development of bond markets and high-quality economic development in China. Firstly, the authorities should take commercial banks as the key to increasing support for bond financing of POEs, who play an important role in stabilizing economic growth, increasing employment, and improving people's livelihoods. But even with many favorable policies, it is still difficult for private enterprises to issue bonds. Since 2021, the net bond financing of POEs has been consistently negative, and the proportion of bond issuance by POEs in the total credit bond issuance has significantly decreased. As the largest institutional investors in China's bond market, commercial banks, whose bond investment scale accounts for about half of the entire bond market, play a pivotal role in boosting bond market activity. Therefore, the authorities should urge commercial banks and other financial institutions to increase their investment in the bonds of POEs, restore the bond market's confidence in private enterprises, and promote the return of private enterprises to the bond market. Secondly, the bond market should be used as a vehicle to cultivate patient capital and increase support for higher-risk enterprises such as those in the technology innovation sector. Amidst the continuous emergence of uncertain factors and persistent downward macroeconomic pressures, investors' risk expectations have been intensifying. Influenced by various factors, including debt risk prevention and control, investors' risk expectations for bond investments in the bond market have significantly increased. Motivated by risk aversion, investors are more inclined to invest in enterprises and bonds with lower risks, gradually squeezing out those with higher risks from the market. Therefore, the bond market should be used as a lever to cultivate patient capital, promote the development of a "tech version" of the bond market, increase financing support for higher-risk enterprises such as technology innovation enterprises, improve the structure of the bond market, and continuously advance the high-quality development of the bond market in order to drive technological innovation. Thirdly, we should strengthen our understanding of the impact that negative shocks may have on financial markets and the real economy and address the balance between risk prevention and “stabilizing leverage”. In recent years, uncertainties have increased, and policy changes in major foreign economies have become more frequent and drastic, increasing the probability of negative shocks to China's economy. How to prevent and control systemic risks while promoting the high-quality development of the financial market and the real economy has become an important issue for China. This paper finds that the effect of debt risk prevention policy will be transmitted to the bond market through the bank credit market and will have a negative impact on the bond financing of private enterprises, which will in turn reduce the scale of enterprise investment. Therefore, the government should strengthen the understanding of the negative impact of various internal and external shocks on the financial market and the real economy, reasonably grasp the policy strength, strengthen the coordination between policies, and deal with the balance between risk prevention and “stabilizing leverage” to better promote the high-quality development of the economy.
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