DP12865 Corporate foreign bond issuance and interfirm loans in China

Author(s): Yi Huang, Ugo Panizza, Richard Portes
Publication Date: April 2018
Keyword(s): bond markets in emerging market countries, carry trade, China, shadow banking
JEL(s): F32, F34, G15, G30
Programme Areas: Financial Economics, International Macroeconomics and Finance
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12865

This paper uses firm-level data to document and analyse international bond issuance by Chinese non-financial corporations and the use of the proceeds of issuance. We find that dollar issuance is positively correlated with the differential between domestic and foreign interest rates. This interest rate differential increases the likelihood of dollar bond issuance by risky firms and decreases the likelihood of dollar bond issuance of exporters and profitable firms. Moreover, and most strikingly, we find that risky firms do more inter-firm lending than non-risky firms and that this lending rose significantly after the regulatory shock of 2008-09, when the authorities sought to restrict the financial activities of risky firms. Risky firms try to boost profitability by engaging in speculative activities that mimic the behaviour of financial institutions while escaping prudential regulation that limits risk-taking by financial firms.