Deregulation of Interest Rates, Equalization of Profit-rate, and Enterprises' Shift from Real to Virtual
YANG Zheng,WANG Hongjian,DAI Jing,XU Chuanhua
School of Management, Wuhan Textile University; School of Economics & Management, Nanchang University; School of Finance, Hubei University of Economics
Summary: Summary: In recent years, the profits of entity enterprises, especially those in the manufacturing sector, have been on the wane under the double impact of an economic downturn and overcapacity. In contrast, financial enterprises have earned excess profits with their monopoly position. The profit gap between the manufacturing and financial sectors encourages entity enterprises to become financialized to obtain excess returns. This has caused entities to gradually deviate from their main business, hollowing out the manufacturing sector, while also stimulating capital demand by entities who are allocating resources to financial assets. This has resulted in a shift from a real to a virtual economy. Interest rate deregulation not only helps to eliminate credit discrimination, match loan risks with loan interest rates, and improve the debt financing conditions, it also strengthens competition in the financial industry, reduces the debt financing costs of enterprises, and leads to profit rate equalization between the real and virtual economies. As a result, interest rate deregulation also affects the investment and financing structures of micro-enterprises. China has gradually formed a market-based interest rate decision mechanism and deregulated interest rates. It is important to study how this reformation has affected macroeconomic growth and the behavior of micro-enterprises. Although the one-size-fits-all policy of loosening interest rate control makes it difficult to identify its microeconomic effects, the dual properties of China's entities provides a natural experiment for examining how interest rates affect the financing of enterprises. By selecting China's A-share non-financial listed companies in the 2001-2015 period as our sample, and by taking the distinct cancellation of the upmost limit and the lowest limit of loan interest rates in 2004 and 2013 as a quasi-natural experiment, the study uses the different property rights of companies to construct a difference-in-difference (DID) model for investigating how interest rate deregulation affects the financialization of the entity enterprises. The results show that the deregulation of the lowest loan interest rate significantly inhibits the financialization of non-state enterprises, whereas the deregulation of the upper limit of loan interest rates has no significant effect, which supports the “market arbitrage” concept. The mechanism test reveals that a relaxation in the deregulation of the lower limit of the loan interest rate significantly inhibits debt costs' erosion of enterprise profits. A further theoretical mechanism test shows that the stronger the profitability, the larger the scale, and the smaller the market competition pressure, the more significant the effect of the deregulation of lower loan interest rate on the suppression of the non-state enterprises' financialization. These results show that the profit margin gap between the real economy and the virtual economy is an important institutional incentive for Chinese entity enterprises' financialization. Therefore, reforming financial marketization will help to inhibit the virtualization of entity enterprises, improve the positive interaction between the real economy and the virtual economy, and boost the rapid development of the real economy. This study makes three main academic contributions. First, it reveals the specific mechanism through which financial marketization reform leads to the financialization of entities from the perspective of interest rate deregulation. It clarifies the significance of financial marketization reform in building a benign interaction between the real economy and the virtual economy. Second, it examines the consequences of interest rate deregulation on the financialization of the entity enterprises, and demonstrates not only the positive impact of financial marketization reform, as represented by interest rate deregulation, but also confirms enterprises' market arbitrage motive for financialization. Third, the quasi-natural experiment and the DID model help to alleviate the possible endogeneity problem between interest rate marketization and financialization of entities. The following issues remain to be explored in future studies: (1) the impact of interest rate marketization, especially benchmark interest rate marketization, on the relationship between the real and virtual economies, along with the deepening of interest rate marketization reform; (2) whether the interest rate marketization influences the behaviors of micro-enterprises by virtue of other mechanisms; and (3) whether a more multidimensional perspective of interest rate marketization can more accurately determine its economic consequences.
杨筝, 王红建, 戴静, 许传华. 放松利率管制、利润率均等化与实体企业“脱实向虚”[J]. 金融研究, 2019, 468(6): 20-38.
YANG Zheng, WANG Hongjian, DAI Jing, XU Chuanhua. Deregulation of Interest Rates, Equalization of Profit-rate, and Enterprises' Shift from Real to Virtual. Journal of Financial Research, 2019, 468(6): 20-38.
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