The Reversal of Leverage Scissors: State-owned Enterprises’ Leveraging or Private-owned Enterprises’ Deleveraging

Abstract

Recently, the debt level of the Chinese corporate sector has risen rapidly. According to BIS, the ratio of debt to GDP in China’s non-financial sector has soared from 96% in 2008 to 166% in 2016, accounting for 61% of China’s non-financial sector debt growth. Behind the skyrocketing debt of the corporate sector, is there any structural difference in leverage changes of different companies? If yes, what is the reason behind it? Using the annual report data of China’s listed companies from 2001 to 2016, we find that the leverages of China’s private-owned enterprises （POEs） are higher than those of state-owned enterprises （SOEs） before 2008. However, the leverage gap between China’s POEs and SOEs has started to turn negative since 2008, a phenomenon we called the reversal of leverage scissors”. Our further research shows that there is no significant relationship between the leverage gap and the local GDP growth before 2008. After 2008, the negative correlated relationship began to emerge. This finding indicates that the relative increase in the leverage ratio of SOEs after 2008 is likely to come from the increasing intervention of local governments on SOEs’ financing decisions, which is sourced from local governments’ increasing pressure to stabilize economic growth. On the other hand, we also find that the degree of financing constraints that POEs are faced does not increase significantly after 2008, which means that the relative decline in the leverage ratio of POEs is probably only the spontaneous adjustment of enterprises in the context of the decline in the macroeconomic growth rate and the reduction of investment opportunities rather than a result of the deterioration of the supply-side financing environment. Moreover, the impact of changes in equity on leverage, the four trillion” stimulus plan, and the direct financing advantage of listed companies cannot explain the reversal of the leverage ratio scissors. Our conclusions are also robust to the different measures of local government intervention and corporate financing constraints. Overall, this study shows that the reversal of the leverage ratio scissors is mainly due to the active leveraging of SOEs caused by local government intervention in the financing needs of SOEs. The main contribution of this paper is to provide a possible explanation for the structural rise of the leverage ratio of SOEs since 2008. Although the existing literature records the time series changes and structural characteristics of the leverage ratio of Chinese enterprises,there is no consistent view on the reasons behind the structural characteristics. In contrast, from the perspective of stabilizing local economy, we have linked the downward pressure of macroeconomic growth to the structural changes of micro-enterprise leverage, forming a chain of downward trend of the macroeconomic growth rate—the pressure of local governments—local governments’ increasing intervention—the structural changes of SOEs and POEs’ leverage—the deterioration of capital allocation efficiency—macroeconomic growth rate decrease”, thus provide a new insight with the structural increase of SOEs’ leverage. In short, our research provides a new and meaningful profile of structural problems of China’s corporate debt, and also provides a reference for the policy choice of structural deleveraging of state-owned enterprises.