Credit Resource Misallocation,Leverage Ratio Divergence And Macroeconomic Stability

Since the 2008 global financial crisis,researchers and policymaker have rethought the role that financial factors played in the macroeconomy.It has become the focus how leveraging works in economic fluctuations and economic growth.On the one hand,based on financial deepening theory,leveraging has a positive impact on economic growth.On the other hand,in view of financial vulnerability,overleveraging debtors' ability to repay debt tends to be more sensitive to the change of income and interest rate,which leads to the increase of financial vulnerability in the whole economy.The leverage problem has ignited concerns of all parties and become the focus of related discussions since 2015.Policymakers has taken a sequence of measures aiming at controlling leverage ratio.At the beginning,deleveraging policies were one-size-fits-all,which evolved into corporate sector deleveraging and then structural deleveraging.Deleveraging policies were adjusted to stabilizing leverage at the end of 2019.According to above background,this paper concludes the structural characteristics and tendency of China's non-financial corporate leverage ratio.In view of debt risks and credit efficiency,this paper analyzes the potential problems and decisive factors of corporate leverage.Regarding stylized facts of corporate leverage divergence in China,this paper uses heterogeneous corporate collateral constraints to explain the stylized facts and verifies how the leverage divergence influences credit allocation efficiency.Moreover,taking corporate leverage divergence into account,this paper clarifies what impact the credit allocation within the corporate sector will have on economic growth and if the central bank can cope with the balance between maintaining economic growth and stabilizing the macro leverage ratio by implementing monetary policy.This paper centers on the macro and micro leverage ratio of China's non-financial corporate sector.According the existing literature,the macro leverage ratio is defined as the ratio of total credit to GDP,implying the sector's debt level and debt sustainability.In terms of the sector classification,the macro leverage can be divided into government leverage,non-financial corporate leverage,household leverage and financial leverage.The micro leverage ratio is defined as the ratio of total debt to total asset,reflecting the financial condition of non-financial corporates at a disaggregate level.Considering the review of existing literature,this paper builds a two-sector partial equilibrium baseline model and three two-sector dynamic stochastic general equilibrium(DSGE)models with heterogeneous collateral constraints for corporate borrowing in accordance with China's economic system characteristics and the stylized facts of non-financial corporate leverage divergence.The three DSGE models include a two-sector real business model,a New Keynesian DSGE model and a DSGE model with an endogenous growth mechanism.The models built in the paper can analyze the macro leverage ratio and micro leverage ratio in the same theoretical framework.Except the parameters commonly calibrated in the existing literature,this paper estimates other parameters and exogenous shocks using China's macroeconomic data and Bayesian method.Moreover,this paper illustrates theoretical mechanisms and results by providing impulse responses,variance decompositions,historical decompositions and counterfactual experiments.The findings in the paper are as follows:Firstly,the structural characteristics of non-financial corporate leverage dispersion in China include two types of leverage dispersion.One type of dispersion is that between the macro leverage and the total micro leverage of non-financial corporate sector.The other one is the dispersion among different types of corporates.Corporates highly leveraged after 2009 are likely to be large-scaled.These corporates are mainly distributed in the real estate,wholesale and retail,transport,storage,post and telecommunication services,utilities,construction and manufacturing industries,most of which are state-owned enterprises.Besides,the divergence of corporate leverage is closely related to China's credit resources allocation method,leading to the mounting debt risks and liquidity risks in the corporate sector.Specifically,small and medium-sized enterprises(SMEs)highly dependent on short term debt have had increasing liquidity risks and high-leveraged enterprises have showed some weakness in the ability of paying off long term debt.And the volatility of asset prices has resulted in the uncertainty of corporate balance sheet condition.Moreover,the structural characteristics of non-financial corporate leverage dispersion also indicates efficiency loss in the process of China's credit resource allocation and utilization.Since the global financial crisis,corporates with higher returns have been deleveraging,while less profitable corporates have kept their leverage ratio at a relatively high level.Even though the credit allocation in several industries has been improved due to the implement of deleveraging policies,there is still room for improvement.In addition,the analysis of financial risks and credit allocation inefficiency related to leveraging divergence should stem from China's bank-led financial system feature.Considering collateral loans and pledge loans as the main types of loans,the decision making of credit demand and credit supply sides can be influenced by the corporate characteristics,the adjustment of macroeconomic policies,specific economic system features and asset price changes in the context of the collateral mechanism.Secondly,the mechanism of heterogeneous collateral constraints within the corporate sector plays a key role in explaining China's divergence of corporate leverage.The mechanism can explain the phenomenon in terms of credit allocation.It is the slack collateral constraint for borrowing on state-owned enterprises(SOEs)and the weak demand of the household sector that contribute to the climbing macro leverage ratio of non-financial corporate sector and the divergence of leverage ratio between SOEs and private-owned enterprises(POEs).On the one hand,when the collateral constraint on SOEs is relaxed,SOEs can borrow more,which leads to the higher price of funding in the credit market.Constrained by strict collateral requirements and the rise of funding price,POEs are forced to deleverage and scale down their production.Therefore,the leverage ratios of SOEs and POEs diverge.In addition,SOEs are unable to transform credit resources into output efficiently.Total credit grows faster than the final output,resulting in the sharp rise of the macro leverage.On the other hand,when the demand is weakening,the household sector chooses to postpone consumption and requires higher wages.Then it contributes to the lower level of total output due to the reduction in the production of SOEs and POEs.Facing the surging marginal cost of production,SOEs with slacker collateral constraint can leverage to maintain their operation and avoid a sharp slump in their output,whereas POEs are forced to deleverage and make large cuts in their investment and production.Because credit resources tend to be directed to less productive SOEs,this worsens the corporate sector productivity.The micro leverage ratio of the whole corporate sector gradually rises and then remains steady,diverging from the mounting macro leverage ratio.Thirdly,not only can heterogeneous collateral constraints on corporates result in China's divergence of corporate leverage,but also will change the long-term economic growth tendency and short-term economic fluctuations by affecting corporates' research and development(R&D)expenditure and productivity.In the framework of heterogeneous collateral constraints for borrowing,when corporates with the slacker collateral constraint gain more credit resources,it can accelerate the economic growth rate in the short term.However,since these corporates are inefficient in R&D,the production technology of the economy has not been effectively promoted.The rapid growth of output is not sustainable in the long run and the macro leverage ratio surges.Additionally,if the economy experiences the demand shortfalls,the growth of output and technology both slow down.All the corporates adjust their production in the same direction,but the corporate with tighter collateral constraint shows more volatility in their production decision considering its lack of liquidity and non-neutral market environment.Based on this transmission mechanism,the negative change in credit allocation and weak demand can explain the climbing macro leverage ratio and the transition from the “high-growth-and-high-volatility” phase to the“low-growth-and-low-volatility” phase in the new normal economy,implying the tradeoff between the long-term efficiency improvement driven by technology progress and the short-term economic growth target.Fourthly,monetary policy can reconcile maintaining economic growth with stabilizing leverage ratio aiming at preventing risks by improving credit structure.These two targets are not contradictory and can boost each other.If the central bank lowers interest rate and strengthens the collateral constraint of SOEs,credit resources will be directed from SOEs to POEs,which can promote the efficiency of credit allocation.This will contribute to maintaining stable growth and stabilizing leverage ratio.Therefore,this monetary policy adjustments can enhance the effects of financing serving the real economy and effectively prevent systemic financial risks.The effects above are related to the borrowing costs of SOEs and POEs.Specifically,the effects can be reinforced by making SOE loan rate more closed to the market rate and reducing POE loan costs.The collateral constraint on SOEs was the main factor of the macro leverage from the second quarter of 2006 to the second quarter of 2018.The adjustment of interest rates has had a greater impact on the macro leverage since 2017.Under the gradually improving macroprudential policy framework,if the central bank targets macro leverage ratio in the Taylor rule,which varies timely according to policy background,the Taylor rule will contribute to the balance between maintaining stable growth,making structural adjustments and guarding against risks.Were the central bank loosening interest rates and strengthening the SOE borrowing constraint,the coefficient of interest rate on leverage ratio should be positive.Based on this Taylor rule's setting,the decrease of the macro leverage ratio will make the central bank further reduce interest rate,and then reinforce the effect of lowering interest rate and strengthen the collateral constraint of SOEs.The results of this paper show that to keep the macro leverage at a reasonable level,the policy maker should stick to structural deleveraging and enhance the efficiency of credit allocation.In the future,the government should pay attention to business environment,corporate debt disposal and monetary policy.Firstly,the policy maker should harden the state-owned budget constraint and build up the business operation environment with competitive neutrality.The government and financial institutions should treat SOEs and POEs with market principles and eliminate inappropriate competitive advantages of some market participants.The government should also motivate SOEs to prioritize the pursuit of quality and profits.Secondly,it is necessary to speed up the disposal zombie enterprises and address the debt stock according to the principle of market.The government should classify zombie enterprises regarding their performance and then ensure the closure of zombie enterprises on schedule.Besides,it can also be helpful to facilitate market-oriented debt-for-equity swaps and the development of the multi-level capital market.It would be easier for corporates to promote equity financing capacity.Thirdly,the central bank should deepen market-based interest rate reforms and effectively reduce the corporate borrowing costs.In terms of stabilizing the macro leverage ratio and improving credit structure,the central bank is supposed to improve the monetary policy transmission mechanism and ensure that the policy interest rate adjustment can be fully transmitted to the credit market.To avoid the tight credit condition caused by financial deleveraging,it is also needed to cut borrowing costs of SMEs and POEs and inject liquidity to the real economy.Compared with existing literature,this paper makes three contributions.Firstly,the paper constructs two-sector corporate models that can match the features of China's corporate and be applied in the further research about China's economic problems.Based on the existing the theoretical research,the models take the setting of heterogeneous corporate collateral constraints for borrowing as the key mechanism and combine with other heterogeneous features of the corporate sector.Secondly,in the context of credit allocation efficiency,this paper connects the macro leverage with the micro leverage and provides a comprehensive analysis about the leverage divergence in China.The paper discusses the cause,economic effect and policy implication about the corporate leverage divergence in China.This discussion can pave the way for the future design of macroeconomic policy aiming at resolving leveraging problems.Thirdly,this paper builds a full-fledged theoretical framework to explore the impact of the leverage divergence and the effectiveness of macroeconomic policy.Since the paper sequentially establishes a two-sector partial equilibrium model,two-sector real business model,two-sector New-Keynesian DSGE model,two-sector endogenous growth model,the results can be an important complement for the theoretical research about China's leverage problem and dual-track economic system.