Study On The Market Risk Of China's Macro Debt And Policy Options

China's economy has achieved rapid growth over the past few decades.When the growing income turns to asset investment through the increasing debt financing leverage,the overall scale of debt and asset investment are rapidly increasing.As the development of China's financial market is lagging behind,its homogeneity and single-structure leads to an accelerated trend of the asset price.In the current context of "new normal",long-term market price is expected to decline systematically,the overall debt burden of the economy as a whole will be more than its nominal amount.In view of this,how serious the risk of China's macro debt is and what kind of risk mitigation policy should be adopted in China,are not only issues that government departments should pay attention to,but also important subjects worthy of studying by economists.Based on the theory and empirical model,this paper systematically studies the macro debt risk of China's economy,which is combined with the abnormal growth of income,the slowdown of economic growth under economic transition,the accelerated growth of debt leverage and the single structure of capital market.Under the framework of financial instability,this paper analyzes the risk level of China's macro debt market by using Discounted Cash Flow(DCF)method and Systemic Contingent Claims Analysis(SCCA)from the angle of debt risk level of sovereign sector,which is tested by the fluctuation of its asset's market value,and the debt risk level of financial system,which is tested by the expected extreme loss of commercial banking system.In addition,based on the international and domestic deleverage cases and on the causes of rapid rise debt level,the paper provides the insight of policy options to mitigate China's current debt risk.The two conclusions from the quantitative analysis of this paper are as follows:Firstly,for 2011?2014,the valuation of assets owned by sovereign sector has approached its total liabilities in corresponding years under sensitivity test of medium-to-high-risk level,and the degree of approximation has kept increasing year by year.Moreover,the total liability of China's sovereign sector would exceed its total asset value under the test of high-risk level,that is so-called the "Minsky moment".All these results show that the expected debt risk of China's sovereign sector is at a relatively high level.Secondly,the paper indicates the expected extreme asset loss of China's commercial banking system would sharply rise when it faces significant risks.Given 10 banks that account for nearly 70%of China's commercial bank assets,the probability of at least one bank going bankrupt could approach 30%during the Global Financial Crisis,namely the period of the second half of 2008 to the first half of 2009.At the confidence level of 99.9%,the estimated loss under joint defaults of these 10 banks is close to 5 trillion.Similarly,the probability of at least one bank going bankrupt could approach 10%in the second half of 2015 and its estimated loss could reach 3 trillion.Consequently,it can be concluded that the financial position of China's commercial banking system is relatively fragile.Once a financial crisis breaks out,the price paid for preventing the crisis from deteriorating could be extremely high.Possible options to resolve the current debt risk include carrying a more effective fiscal policy to support the economic growth,establishing a mechanism of regulating the proportion of state holdings through flexible investment allocation by strengthening the marketized operations and weakening the direct management of state-owned assets,establishing a more structured monetary policy to limit the further increasing lever of large enterprises and financial institutions,developing direct equity investments and promoting the process of asset securitization,such as debt-to-equity and loan-to-equity swaps.Main innovations of the paper are as follows:The first one is the optimization of Systemic Contingent Claims Analysis(SCCA)to construct Multivariate Extreme Value Distribution Function.In order to estimate the systematic default risk of China's overall economic system,the student-T copula function is adopted to describe the inter-bank structure and the extreme loss of assets owned by commercial banks under certain financial conditions.Meanwhile,to better measure the expected debt risk of sovereign sector,some parameters of the Free Cash Flow Model(FCFF)are optimized to simulate the reality.The second innovation is about the theory application,which indicated by the examination of the risk-adjusted balance sheet of China's sovereign sector,as well as the application of DCF model on sovereign sectors with reasonable risk parameters.Lastly,to better estimate the expected state of national debt risk,multi-scenario sensitivity analysis is adopted to measure the confidence interval of the valuation,considering the uncertainties of the value of market risk parameter.