Quantifying the Effects of Financialization and Leverage in China

Abstract

This article attempts to examine the effects of financialization and leverage on China’s economic growth and income inequality. The empirical results suggest that the effects of the financialization indicators are ambiguous and weak; however, the leverage indicators do have negative impacts. We find that the ratio of nonfinancial private debt to GDP has significantly negative impact on China’s growth, whereas the effects of the ratio of public debt to GDP are insignificant. Moreover, at the disaggregated level of nonfinancial private debt, it is the higher nonfinancial corporate debt level rather than the household debt level that remarkably undermines China’s economic growth. In addition, we have identified important threshold levels for several indicators of financialization. Finally, we find that the rise in the household debt level could significantly reduce the income inequality, and the ratio of M2 to GDP is positively related with the income inequality in China.