Has Financial Marketization Promoted Structural Deleveraging in the Corporate Sector? Evidence from Chinese Manufacturing Companies

Abstract

Since the outbreak of the financial crisis in 2008, China’s leverage ratio has surged, especially in the corporate sector, which has created great hidden dangers for the economic development of our country. Deleveraging is an important measure to prevent and resolve systemic financial risks. Particularly, although the economy of our country is currently operating smoothly, it is also facing downward economic pressure due to some domestic and foreign factors. To properly handle the relationship between “deleveraging” and “stable growth”, it is necessary to not only continue deleveraging so as to prevent accumulative risks, but also prevent the intensive risk outbreak of high-indebted companies, and avoid the need for reasonable investment and financing of low-indebted companies being not satisfied. For this reason, the central government proposed “structural” deleveraging. How to accomplish the goal of structural deleveraging has become the focus of the government and academic circles. This paper demonstrates how financial marketization promotes structural deleveraging in the corporate sector from a theoretical and empirical perspective. Theoretical analysis shows that financial marketization improves the efficiency of cross-enterprise resource allocation so that more resources flow to profitable companies, which promotes the structural deleveraging of the corporate sector in the process of resource mobility between strong and weak companies. In order to verify the hypothesis proposed in the theoretical part, this paper uses the data from the industrial enterprise database from 2008 to 2013 to empirically examine the impact of financial marketization on corporate leverage. By using the panel threshold regression, we analyze the impact of financial marketization on the structural deleveraging of corporate sector. Taking the profitability of enterprises as the threshold, the empirical results show that:（1）Financial marketization has a non-linear impact on corporate leverage by adjusting the allocation of credit resources: On the one hand, financial marketization will reduce the leverage of companies with weak profitability, which will increase the leverage ratio of companies with strong profitability, and achieve the goal of structural deleveraging in the corporate sector in the process of one reduction and one increase. However, this process will be affected by “non-marketization” factors such as soft budget constraints.（2）Financial marketization has little effect on the structural deleveraging of state-owned enterprises, and has a significant impact on non-state-owned enterprises.（3）Financial marketization can obviously promote the structural deleveraging of corporate sector in the eastern region, and the impact on the central and western regions is limited. Therefore, in the “deleveraging” process of supply-side reforms, special attention should be paid to the structural nature of leverage within the corporate sector, to reduce cross-enterprise resource misallocation caused by non-marketization factors, and to accelerate the process of financial marketization in the central and western regions.