Research on the Multilayer Network of Debt Risk Contagion
YANG Zihui, WANG Shudai, LI Dongcheng, LENG Tiecheng
SUSTech Business School, Southern University of Science and Technology; School of Finance, Guangdong University of Foreign Studies; Lingnan College, Sun Yat-Sen University; School of Management, Harbin Institute of Technology
Summary:
Since 2020, China's bond market has experienced unexpected defaults of AAA-rated bonds and defaults by real estate companies. This abnormal fluctuation in the bond market presents a huge threat to the stability of the financial system. In this context, the Report to the 20th National Congress of the Communist Party of China states that “we will reinforce the systems that safeguard financial stability, place all types of financial activities under regulation according to the law, and ensure no systemic risks arise.” Thus, preventing systemic shocks caused by default events is crucial to ensuring the development of the capital market and the macroeconomy. We use the credit spreads of municipal investment bonds and enterprise bonds to construct multilayer networks of debt risk. We identify the source of turbulence in multilayer networks based on the leave-one-out method (Hué et al., 2019). Furthermore, considering the heterogeneity of the bond markets, we apply the latest network combination technology proposed by Bonaccolto et al. (2019) to integrate risk information in linear and nonlinear networks and examine the cross-regional and cross-industry contagion effects of debt risk. Finally, we provide empirical evidence for the trade channel of debt risk contagion. We contribute to the research on the contagion effect of financial risk. First, the literature pays less attention to the debt-risk contagion of the Chinese corporate sector. However, as the debt scale of non-financial enterprises in China continues to rise, bond default has a significant negative impact on the stability of the financial market. This requires us to analyze the potential risk of municipal investment bonds and enterprise bonds. Second, bonds with different credit ratings and bonds from different issuers may have various risk characteristics, so analyzing debt risk in China based on multiple networks could be very valuable. This paper makes an innovative attempt to do so. Third, our work has strong policy implications. To the best of our knowledge, we are the first to show the path of debt risk transmission in China using network combination technology. This approach provides a practical scheme for the measurement and early warning of debt risk. Our sample consists of municipal investment bonds in 25 provinces from January 1, 2017 to June 30, 2021, and enterprise bonds in 22 industries from January 1, 2017 to December 31, 2020. All of the data are from the Wind Database and the China Statistical Yearbook. We find that China's central and western regions have higher systemic importance in the bond market than other regions because of the weak economic foundations. Nevertheless, the eastern regions, which are densely populated and highly export-oriented, have been significantly affected by the COVID-19 pandemic. As a consequence, the systemic importance of China's eastern provinces in the nonlinear enterprise bond network increased dramatically after 2020. Additionally, in the enterprise bond market, the real estate sector is an important source of risk. The recent default of AAA bonds is another important factor affecting market sentiment. Finally, we show that debt risk may be transmitted through regional trade relationships. Good economic fundamentals are the key to preventing debt risk contagion. These real economic factors mainly play a role in affecting the enterprise bond market. Based on the findings mentioned above, we provide several suggestions for improving the debt default disposal mechanism and preventing debt risk contagion. First, for the municipal investment bond market, China should closely monitor the risk dynamics in its central and western regions. The regulatory authorities should guide local financing platforms to improve the efficiency of their capital use and the profitability of the platform. In addition, local financing platforms should improve their information disclosure mechanisms to maintain investor confidence. Second, for the enterprise bond market, China should pay close attention to the risk dynamics of the real estate and transportation industries and implement stricter rules for bond issuance in high-risk industries. It is also important to ensure the independence of credit rating agencies by developing an investor-payment model. Third, China should establish a regional debt-risk monitoring system based on interprovincial trade flows. When trading partners default, local governments should take measures to boost market sentiment, create a stable and efficient capital market, and contribute to the high-quality development of the real economy during the “14th Five-Year Plan” period.
杨子晖, 王姝黛, 李东承, 冷铁成. 债务风险传染的多重网络研究[J]. 金融研究, 2023, 513(3): 38-56.
YANG Zihui, WANG Shudai, LI Dongcheng, LENG Tiecheng. Research on the Multilayer Network of Debt Risk Contagion. Journal of Financial Research, 2023, 513(3): 38-56.
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