Centre for Economic and Regional Studies Hungarian Academy of Sciences Centre of Excellence

Start: 05/07/2015 14:00

End: 05/07/2015 16:00

Location: Budapest XI., Budaörsi út 45. VIII/807. (conference room).

Description

Lecture:

Yu Yongding
China's corporate debt: causes and implications

 

Abstract:

According to Minsky (1992), financial instability is a result of the fact that cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts. After the 2008 Global Financial Crisis, China’s total debt-to GDP ratio has risen rapidly. China’s corporate debt is particularly worrying. According to a study by Chinese Academy of Social Sciences, for China’s nonfinancial corporates as a whole, the debt-to-GDP ratio was 113 percent by the end of 2012. According to Standard and Pool, by the end of 2013, the total debt of China’s nonfinancial corporates was $14.2 trillion dollar, which has surpassed America’s $13.1 trillion and became the largest in the world. However, despite the large number of research on China’s debt issues in general, and corporate debt issue in particular, all researches we are aware of are descriptive, and there are almost no studies that give the trajectories of Chinese corporate debt-to-GDP ratio with specific numbers. The few studies that come out with some numbers are result of extrapolations based on very strict assumptions.
The profitability of China’s industrial enterprises is falling continuously, the borrowing costs for industrial corporates is in the rise, China’s capital efficiency are deteriorating. Finally China’s growth target is 7%. What are the implication of these development on China’s corporate debt-to-GDP ratio? To answer this question, a dynamic model is created to figure out the possible trajectories of China’s corporate leverage ratio. The presentation will introduce the specification of the model and data-mining and process for the simulation. The conclusion of the study is that despite the fact that China’s savings rate is very high and hence China’s ability to digest debt is strong, if China fails to reverse the current deterioration of major indicators of economic efficiency, the rapid rise in China’s corporate leverage will cause serious trouble for China’s financial stability.