Research On The Risks Of High Leverage In The Chinese Economy

The soaring leverage of China is causing national and even international concerns about Chinese financial stability,especially since China is accelerating transformation and upgrading of the economic structure under the new normal.This paper analyzes the level and the structure of macro leverage and its relationship with systemic risks.Through an intensive study on related researches,this paper evaluates the level and the structure of Chinese leverage.It finds that the problem is not on the absolute level of the leverage but on its structure.First,the leverage ratio of non-financial corporations is extensively high,to which the corporations of large-size and heavy-asset industry contribute the most.And then debts of local governments and the rapid rising leverage of households need to be paid attention to.The fast development of shadow banking may be a threat although the leverage of the financial sector that is counted according to the financial bonds is not high.Based on the Financial Stress Index(FSI)and VAR model,this paper studies the relations between the macro leverage and systemic risks theoretically and empirically.The results are as followings.First,the unsustainability of leverage,which is caused by the cost-benefit mismatches and maturity mismatches,accumulates the risks and reduces the system's tolerance to negative shocks.Second,under the background of high leverage,risks are easier transmitted through the debt channel.As the biggest creditors,banks may suffer the most shocks.Besides the large scale of defaults is most likely to occur in the non-financial corporations sector in consideration of the high leverage ratio and inefficient capital utilization of this sector.Third,if the asset bubbles that soar under the background of the high leverage burst,the wealth of the society will shrink.Companies will be more reluctant to do investment,resulting in the credit-crunch,the recession and even the depression.Finally,the empirical results support the theoretical analysis that the rising leverage pushes up the risks.Besides the financial stress index of the bank sector is more sensitive to the leverage.Therefore,the deleveraging is necessary.However,the balance among the deleveraging,the stability and the growth should be taken into consideration in the deleveraging process.