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Does Reducing the Proportion of Indirect Financing Help to Deleverage?—An Analysis of the Relationship Between Financial Structure and Leverage Ratio

【Authors】
LIU Zhexi, WANG Zhaorui, LIU Lingjun & CHEN Yanbin
【WorkUnit】
LIU Zhexi (University of International Business and Economics, 100029)WANG Zhaorui, LIU Lingjun, CHEN Yanbin (Renmin University of China, 100872)
【Abstract】

China's financial structure dominated by indirect financing is often considered to be the main reason for the high leverage ratio, so reducing the proportion of indirect financing is seen as an effective means of deleveraging. However, this paper uses the neoclassical growth model to demonstrate the relationship between the proportion of indirect financing and leverage ratio, and after empirical tests of cross-country data, we find this argument open to question. (1) The proportion of indirect financing to leverage ratio is in a U-shaped nonlinear relationship, not a positive correlation suggested by most studies.(2) The inflection point value of the U-shaped curve will be affected by factors such as the efficiency of credit allocation: the higher the efficiency, the higher the inflection point of the U-shaped curve, and the higher proportion of indirect financing will not lead to excessive leverage. Based on this, this paper believes that China's high leverage problem cannot be simply attributed to the high proportion of indirect financing; the low efficiency of credit allocation is a bigger reason. It will be more helpful to lower China's leverage ratio by deepening the market-oriented reform of the interest rate and other related measures to improve the efficiency of credit allocation.


JEL:C23, E44, G21

【KeyWords】
Leverage Ratio, Financial Structure, Indirect Financing, Resource Mismatch