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Review of Quantitative Finance and Accounting

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13.04.2021 | Original Research

Not all shadow banking is bad! Evidence from credit intermediation of non-financial Chinese firms

verfasst von: Vinh Q. T. Dang, Isaac Otchere, Erin P. K. So, Isabel K. M. Yan

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 4/2021

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Abstract

Using data from 2009 to 2016 data, we investigate the relation between leverage and investment in listed firms in China against the backdrop of rising shadow banking. We examine a component of Chinese shadow banking specifically related to firm financing: entrusted loans that arise through credit intermediation among non-financial listed firms. We identify credit intermediation by estimating the elasticity of liquid financial assets to financial liabilities. Our fixed-effect instrumental variable estimation shows that credit intermediation among Chinese firms positively affects firm investment efficiency. In particular, as firms lend to other affiliated firms, the enhanced lender-borrower interest alignment alleviates debt overhang problem that firms must otherwise fully endure in industries where there is no active credit intermediation. For private firms, affiliation with lending state-owned enterprises is a substitute for political connection, as both forge stronger interest alignment and reduce debt overhang. We observe a similar outcome for state-owned enterprises in industries where credit intermediation is performed by either private or state firms. Moreover, credit intermediation exerts some disciplinary effects on the investment of low-performance firms. Our findings are robust to different measures of firm performance.

Vorheriger Artikel The value of in-person banking: evidence from U.S. small businesses

Nächster Artikel Evaluating risks-based communities of Mafia companies: a complex networks perspective

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For China, this point is put forth by Li Yang, director of National Institute for Finance and Development, a Chinese think tank (reported by Sina News in Chinese on May 19, 2018 at news.sina.com.cn/c/2018–05-19/doc-ihaturfs6560933.shtml).

See “Top Bank Regulator Calls for More Lending to Private Sector", Caixin Global, November 9, 2018.

Entrusted loans are loans made by a non-bank party (e.g., an industrial firm, or an entity sponsored by a local government, or a private equity fund) to another, using a bank as a servicing agent or trustee. Informal lending involves loans between private entities with no payment agents. Trust loans are loans made to trust companies. The trust companies in turn structure these loans into trust schemes or wealth management products and sell them to investors. Wealth management products (excluding entrusted or trust loans as underlying assets) are asset backed securities sold to investors. Underlying assets include bonds, interbank placements, and discounted bills. Banks can be either the entity that structures them or distributor, or both (Allen et al. 2019).

These estimates come from United Overseas Bank (UOB) Global Economics and Market Research, 08 August 2018 publication (https://www.uobgroup.com/web-resources/uobgroup/pdf/research/MIR-20180808.pdf).

Related party loan guarantees, which are provided by listed firms as an alternative method of securing debt financing for related-parties, complement or substitute for intercorporate loans. Such guarantees are provided by listed firms to ensure the repayment of loans granted by banks to related-parties (Huang, 2016).

WMPs are not only offered by large banks, but also by small banks, trust companies, and security firms. Hachem and Song (2016) suggest that the government’s stricter enforcement of the limit on loan-to-deposit ratio as a response to the sign of overheating economy in 2010 led to a rise in shadow finance because both large and small banks decreased traditional lending to comply with tighter regulations but migrated to shadow banking by offering more WMPs.

Although stricter regulations have reduced the scale of the shadow banking from the peak of RMB 65.4 trillion, or 87% of GDP at the end of 2016, it remains an integral part of China’s financial system, amounting to 62.9 trillion RMB, or 73% of GDP at the end of June 2018; this is reported by China Daily in “Moody’s: Shadow Banking Contraction to Moderate” on August 21, 2018. In addition, negative impact on growth from the ongoing Sino-US trade friction has put some pressure on the Chinese government to maintain sufficient liquidity for enterprises, through both formal and informal banking channels, including entrusted loans.

This is reported by The Economist in “China’s tighter regulation of shadow banks begins to bite” on June 14^th, 2018.

Allen et al. (2019) manually collected loan information disclosed from the annual report of listed Chinese firms. Their sample, covering the period of 2004–2013, contains around 111 firms and 300 loans per year on average. Although their study provides useful insights, their sample size is small in comparison with the number of listed firms and with the amount of entrusted loans estimated in many industry publications.

Moreover, Tobin’s Q may not adequately reflect the investment opportunities, especially in emerging markets, where political factors exert undue influence on stock prices. The potential correlation between leverage and omitted variable may undermine the regression estimation.

A potential alternative to fixed effect IV model is dynamic GMM estimation. Firth et al. (2012), who examine the link between investment and financing channels for China’s listed companies under a bank-dominated credit environment, find that the instruments in the dynamic GMM model estimation are too weak and the dependent variables is not influenced by prior realizations. Dynamic GMM model is not superior to fixed effect model under this scenario (Roodman, 2006). Although Firth et al. (2012) simply use fixed-effect estimation, we introduce instrumental variables to account for possible endogeneity of leverage in our estimation.

The coefficient of this term is positive (0.179) and significant at 5 percent in column (3), indicative of subsidy effect; but the change in the sign of this term is probably caused by the reliability of Tobin’s Q as a performance measure, as discussed above.

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Titel: Not all shadow banking is bad! Evidence from credit intermediation of non-financial Chinese firms
verfasst von: Vinh Q. T. Dang
Isaac Otchere
Erin P. K. So
Isabel K. M. Yan
Publikationsdatum: 13.04.2021
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 4/2021
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-021-00983-4

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