| Abstract | Since the financial crisis in 2008, external demand shock and lack of domestic demand have made the Chinese economy, which have been continuously and rapidly growing for nearly 40 years, can not be immuned. The central government launched a series of expansionary fiscal policy and monetary policy to stabilize Chinese economy. But the direct consequences of these policies are the high level of leverage around whole society, a serious excess capacity in traditional industries, the outflow of financial resources from the real economy, as while as the significantly decrease in economic efficiency. To analyze the reasons of the “high leverage, overcapacity, imbalance between the real economy and fictitious economy, and low efficiency” facing by the China's economy, this paper emphasizes the financing heterogeneity between the state-owned sector and private sector based on the actual data of the current economics situation, and empirically documented that the higher leverage for state-owned firms do deteriorate the future investment and profitability particularly much more than for private firms. Then with the dual economic sectors framework given by Song et al. (2011), we introduces firms’ financing heterogeneity into the theoretical model to drive the economic logic of overleverage, overcapacity, as well as the prosperity of fictitious economy and the low efficiency of real economy, aiming to provide theoretical foundation for the government decision in the supply-side structural reform process.
It is easy to see from the stylized fact of economics data that the high level of debt in whole society comes from the significant increase in the non-financial enterprises and government departments. By carefully examining the status of non-financial enterprises, the state-owned enterprises with low production efficiency and profitability have much easier access to external financing sources and opportunities, which leads to the impulse of excessive investment. Unsurprisingly, the squeezing effect of financial support for peers in the private sector is obvious, thereby distorting the financial resource allocation structure and lowering the overall social production efficiency. The empirical analysis of the panel data of Chinese A-share listed companies further confirms that with the advantage of the support of external financial resources, the investment willingness of state-owned firms, under serious budget soft constraints, is significantly lower than that of private firms. Meanwhile, the high leverage level not only has a significant negative impact on firms’ own profitability, but also hardly improve the future growth ability of enterprises. Especially, the profitability of state-owned enterprises declines even more, which means it is the right time to reduce the leverage level and build a fair financing environment for private enterprises.
Based on facts and empirical analysis of China’s economy discussed above, this paper constructs an equilibrium model with financing heterogeneity between the state-owned and private sector to further explains the driving of current economic dilemma in China. According to the framework of Song et al. (2011), firms are divided into two categories in our paper: state-owned and private. Although state-owned firms have lower productivity and operation efficiency, their assets are larger and endorsed by external financial institutions. But for private enterprises, although with higher productivity, they mostly have to rely on their operating profit to finance the future investment, because it is difficult to obtain external funds without enough collaterals or guarantees. The results of theoretical analysis and the following numerical simulation show that the unbalance of external financing between state-owned and private enterprises has obvious influence on the follow-up capital investment and thus final output. Because state-owned enterprises enjoy lower financing cost and more financing convenience, the soft budget constraint is obvious, even if the productivity is lower. And they will continue to increase the leverage and then expand capacity blindly, while private enterprises in the context of financing discrimination, can only rely on their own profit accumulation to meet requirement of the capital investment and expansion. In the normal times, the investment and capacity of private enterprises is significantly higher than the state-owned enterprises. However, once the financial crisis happens, when suffering the shock of external and internal demand, state-owned enterprises with easy access to financial support would still maintain a high capital investment, resulting in excessive overcapacity especially in traditional industries; and private firms would fall into the decline in profits, leading to lower investment and output growth. Eventually the overall economy would be harmed in term of productivity. Specifically, in the context of bad times, state-owned enterprises with budget soft constraints will continue to squeeze financial resources for private peers, and mainly invest to financial assets, resulting in financial resources rapidly drained from physical entities and pushing up prices of financial assets to irrational levels.
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