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Bonded to the State: A Network Perspective on China’s Corporate Debt Market

Bonded to the State: A Network Perspective on China’s Corporate Debt Market. Li-Wen Lin Curtis J. Milhaupt. Background and Motivation. Understanding the mechanisms of Chinese state capitalism (Lin & Milhaupt 2013)

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Bonded to the State: A Network Perspective on China’s Corporate Debt Market

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  1. Bonded to the State:A Network Perspective on China’s Corporate Debt Market Li-Wen Lin Curtis J. Milhaupt

  2. Background and Motivation • Understanding the mechanisms of Chinese state capitalism (Lin & Milhaupt 2013) • Corporate bond market as a “spare tire” (Greenspan 1999; cf Levine et al. 2015)

  3. Argument • State-centric network as substitute for formal institutional infrastructure • Result: huge, but institutionally fragile market • Frames questions about functions and future of Chinese CBM

  4. Outstanding Balance by Type of Bond

  5. Outstanding Corporate Debt Securities, by Regulatory Jurisdiction

  6. Enterprise Bond Issues (Billion RMB): Central v. Local SOEs

  7. Number of Enterprise Bonds Issued by Private Enterprises

  8. Actors in China’s Corporate Bond Network

  9. Linkages Among Actors • Equity Ownership • Personnel • Membership in party-state organs

  10. State Ownership

  11. Issuer-Guarantor Relationship, (By Outstanding Balance) Guarantors Issuers

  12. CEO/Chairman Career Network

  13. Consequences of State Centricity • Market’s Developmental Trajectory • cf Japan, Korea • Market Operation • Access to bond finance: SOEs and LGFVs privileged • Ratings: Skewed and concentrated • Pricing: Hierarchical/artificial • Issuer Distress: Handled with no-default norm

  14. Nominal Yields, By Type of Issuer and Debt Instrument Corporate Bonds Enterprise Bonds Commercial Paper Mid-Term Notes

  15. No-Default Norm:Components and Motivations • TCTF: Too Connected to Fail (political risk) • TMTF: Too Many to Fail (social risk) • TBTF: Too Big to Fail (contagion risk)

  16. Handling Defaults: Illustration Tianwei CNEG/China Erzhong Issuer has state-owned parent Small amount of bonds outstanding Creditors file bkrcy petition Parent rescues financially troubled issuer Bond holders are paid in full Bonds publicly traded • Issuer has state-owned parent • Small amount of bonds outstanding • Issuer files for bankruptcy • Parent refuses to rescue financially troubled issuer • Bankruptcy process ongoing • Bonds held by small number of SOEs

  17. Policy Questions/Implications • Chinese CBM as a spare tire? • Network to Market? Regulatory Competition • Decline of No-Default Norm? Bankruptcy Law • Implications of Shadow Banking System?

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