|Author:||Fung, So Ching Jenny|
|Title:||Understanding the high leverage of China's listed companies|
|Subject:||Hong Kong Polytechnic University -- Dissertations|
Stock companies -- China
Financial leverage -- China
|Department:||Faculty of Business|
|Pages:||170 pages : color illustrations|
|Abstract:||In recent years, financial leverage has become one of the most discussed economic topics in China. In the Central Financial Work Conference held on July 14, 2017, unlike the usual emphasis on the growth and expansion of the banking industry, the focus of the year's meeting shifted to the financial and real economy, especially strengthening supervision and preventing systemic risks. "Maintenance of national financial security" was the subject of collective learning in the Politburo meeting held on April 25, 2017, reflecting the importance attached to the prevention of financial risks from the top down. In the same year, the third-party conference released a document to strengthen financial supervision and prevent high financial risks. How serious is China's financial leverage problem? Why is the current financial high leverage worth paying attention to, and how does it perform? In describing China's financial leverage, some international financial institutions have proposed quantitative assessment indicators. A report released by the IMF (International Monetary Fund) on April 19, 2017 (the Global Financial Stability Report (GFSR)), mentioned that the rapid growth of China's credit has continued to increase the risk of financial stability. According to the IMF report, the current size of China's banking industry has reached more than three times GDP, while other non-bank financial institutions have increased the credit risk. How does it happen? Following the eruption of the "subprime mortgage crisis" in the US, China's GDP growth rate has rapidly declined, and its exports have grown adversely. The economy is facing a hard landing risk. In response to this crisis, the State Council launched a stimulus plan known as the "four trillion plan" in November 2008. However, in the next few years, the side effects of the plan erupted, mainly due to the influx of cheap credit into the market, the emergence of real estate price bubbles, the expansion of local debt, excess production capacity, and excessive currency reserves (M2) "save the market", but brewing a "crisis". For these consequences, the market and the public feel anxious, and the government is wretched. Local governments also suffer from high debts. Not only did they not invest in any financial freedom as before, but they also face enormous debt pressure. The local government believes that under the stimulus plan, the central government requires the local government to report on the project and start it as soon as possible, and in the implementation process. In the form of administrative intervention, banks are required to lend or buy bonds to local governments and enterprises.|
The central government also understands the severe consequences of high leverage in this past decade and has recently put "de-leveraging" as a primary policy objective. Unfortunately, the unexpected "trade war", on a massive scale, initiated by the Trump administration of the United States, is a significant danger to China's economic growth which remains a relatively robust annual rate of growth of 6.7%. The possibility of economic downturn forces the Chinese government to withhold the de-leveraging efforts and re-start some monetary easing policies. Such measures would necessarily lengthen the high-leverage problems. It is such a background that motivates this study to examine the leverage problems of China. Of course, it is too big and complex an issue for a thesis to cover. Hence, this thesis is best viewed as a preliminary study on a specific aspect of this significant issue, i.e. an analysis of the leverage situation of Chinese listed companies. Through this investigation, it is hoped to shed some light on this very timely and relevant issue. The findings of the dissertation suggest that Chinese companies do not observe optimal capital structure that much. The findings do not fit into the structure of an optimal capital structure, but they still indicate some mean-reversion in the leverage ratio. The empirical data confirms that state-owned enterprises (SOEs) are likely to incur higher levels of leverage than non-SOEs. In contrast, a firm's political connections do not predispose it to higher levels of leverage; however, this observation pertains to accounts in audited financial statements and does not include off-balance-sheet leverage and similar opaque forms of debt. Cash holdings significantly impact firms' investments, while cash flows do not. The critical variable, that is, the leverage by Chinese firms, has favourable effects on investment dynamics. The research findings show that higher leverage increases the investment sensitivity of cash holdings. So, higher leverage is mainly used to finance investment expenditures. This channel is especially strong for companies that have higher levels of tunnelling. However, the outcomes also imply that leverage lowers the investment sensitivity to cash flows. However, these outcomes only indicate that firms do not use cash flows that much to finance their investments. As further outcomes, higher leverage also leads to higher performance. This indicator is measured by the return on assets and higher company valuation, which is measured or de by Tobin's Q. Also, leverage does not lead to higher crash risk. Overall, leverage is found to produce favourable effects in the Chinese economy, with higher leverage leading to higher investment, return on assets, Tobin's Q, while it also does not increase the crash risk.
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