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Corporate Default Risk and Loan Pricing Behavior in China

Hongyi Chen

Jianghui Chen

Gaofeng Han

Emerging Market Finance: New Challenges and Opportunities

ISBN: 978-1-83982-059-5, eISBN: 978-1-83982-058-8

Publication date: 28 September 2020

Abstract

This chapter studies banks’ loan pricing behavior in mainland China during 2003–2013 by applying panel regressions to firm-level loan data and the estimated default likelihood for listed companies. The authors find that with the progress of market-oriented financial reforms, banks generally require compensation for their exposure to borrowers’ default risks. It is even more so if the borrower is a non-state-owned enterprise (non-SOE), mainly due to the pricing behavior of the Big Four banks. Bank lending rates are shown to be less sensitive to the default risks of state-owned enterprises (SOEs). Our results also reveal that banks priced in firm default risks before 2008 financial crisis, but not necessarily so after the crisis. As for industries, we find that after the 2008 Global Financial Crisis, the real estate sector and other government-supported industries tended to enjoy better terms on loan pricing in terms of default risks. We believe the main reason is that the government stimulus policies tilted toward those industries that have played crucial roles in China’s economic growth.

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Acknowledgements

Acknowledgments

The authors thank Ying Bai, Yichuan Hu, Kang Shi, Zhibo Tan, Giorgio Valente, Haichun Ye, Chong Kee Yip, and the anonymous referee for their helpful comments. Remaining errors are ours. The views expressed in this chapter are those of the authors, and do not necessarily reflect those of the Hong Kong Monetary Authority, Hong Kong Institute for Monetary and Financial Research and, its Council of Advisers or Board of Directors.

Citation

Chen, H., Chen, J. and Han, G. (2020), "Corporate Default Risk and Loan Pricing Behavior in China", Jeon, B.N. and Wu, J. (Ed.) Emerging Market Finance: New Challenges and Opportunities (International Finance Review, Vol. 21), Emerald Publishing Limited, Leeds, pp. 55-73. https://doi.org/10.1108/S1569-376720200000021004

Publisher

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Emerald Publishing Limited