School of Finance, Zhongnan University of Economics and Law; School of Finance, Shanghai University of Finance and Economics; FICC Department, Zhongtai Securities
Summary:
The capital market acts as a bridge to achieve market-based deleveraging through market-based approach and promote the optimization of the financing structures. Specifically, the capital market regulates the allocation of funds through its price discovery function, influencing the investment decisions of micro-individuals and leading to changes and adjustments in industrial structure. On the transmission chain of "price effect-resource allocation-micro investment-macro changes," external shocks lead to price changes in the stock market and bond market, which can generate economic externalities. However, there are currently few academic researches on whether overvaluation or undervaluation of bond market prices will produce the same capital change effects. A prominent feature of China's bond market is the expectation of rigid redemption for state-owned enterprise (SOE) bonds, which has led to the long-term overvaluation of many SOE bonds. Due to their greater financing advantages, some SOEs in high-pollution and high-energy-consumption industries tend to overinvest, resulting in overcapacity in the real economy and even the prevalence of "zombie enterprises." Obviously, the overvaluation of bond market prices exhibits negative externalities. However, does the capital market exist a negative transmission chain of "negative shock-price decline-capital outflow-industry contraction"？ Cases such as the "Yongcheng Coal and Electricity Holding Group Co., Ltd. bond default" have shown that debt defaults of local state-owned enterprises can severely deteriorate the credit environment of local governments and related industries, with spillover effects causing significant difficulties in the issuance of corporate bonds in the same region and industry. Thus, it can be inferred that if the government reduces the level of implicit guarantees for SOE bonds, the decline in bond prices (and increase in financing costs) may push capital to flow out of inefficient enterprises, limit the funding supply to overcapacity enterprises, and provide a feasible path for clearing out backward capacity and optimizing industrial structure through market means. Does the aforementioned transmission mechanism exist in the capital market？ Taking the policies implemented by the central and provincial (municipal) governments starting from the fourth quarter of 2015 to deal with enterprises with backward production capacity as an external shock, this paper uses a time-varying Difference-in-Differences (DID) method to compare the changes in bond financing, bank credit financing, leverage ratio, and other aspects between enterprises with outdated capacity and normal enterprises within state-owned enterprises. In this paper, we find that with the reduction in the level of implicit government guarantees by the implementation of the "cutting overcapacity, reducing excess inventory, deleveraging, lowering costs, and strengthening areas of weakness" policy, the bond prices of outdated production companies have fallen sharply. The bond issuance spread in the primary market has increased over 100 basis points on average, corresponding to a decline in bond prices by approximately 2.5%; among them, the issuance interest rates for long-term bonds have risen by over 160 basis points, corresponding to a decline in bond prices by more than 6%. The decline in bond prices has led to a significant reduction in the financing scale of bonds issued by enterprises with outdated production capacity, and the capital outflow effect on these enterprises is evident. However, the price contraction effect does not result in a decrease in the leverage ratio of enterprises with outdated production capacity, due to the refinancing support provided by other financing channels, which fills the gap in bond financing for these enterprises. Mechanism tests demonstrate that there is a relatively complete price discovery function in the bond secondary market, which can quickly respond to negative information and make adjustments. Moreover, the bond market exhibits distinct pro-cyclical characteristics in terms of capital allocation. It can fully reflect changes in the fundamentals and effectively mitigate financial risks and give full play to the pivotal role of the capital market. The policy recommendations of this paper are as follows: The bond market can optimize resource allocation through its price discovery function, achieving structural deleveraging and other supply-side reform goals while maintaining overall economic stability. Therefore, it is necessary to further leverage the pivotal role of capital markets, significantly increasing the proportion of direct financing in the macro-financial system and corporate micro-debt structure, enriching bond product offerings, and advancing the development of high-yield bond markets. It is also essential to gradually break the rigid redemption expectations for state-owned enterprise bonds, achieving market-based pricing for their issuance. Secondly,the construction of information disclosure and risk disclosure systems in the bond market should be further strengthened. The quality of information disclosure by bond-issuing enterprises should be improved to reduce information asymmetry, laying a solid foundation for the effective functioning of the bond market's regulatory mechanisms. Finally, to enhance the effectiveness of various fund placements, it is crucial to strengthen policy expectation management, guiding micro entities to form stable and consistent expectations of macroeconomic control targets, thereby reducing economic uncertainty.
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