Shadow Banking of Non-Financial Enterprises and the Related Operational Risks - Empirical Evidence Based on Listed Companies, a paper co-authored by our school’s Professor Li Jianjun, and Han Xun, a teacher from the School of Economics of the Beijing International Studies University, was published in the 2019 8th issue of Economic Research Journal.
Economic irregularities have surfaced frequently in recent years, such as high leverage ratios, chaos about financial asset investments and a tumbling real economy. On the one hand, pan-financial areas including finance, insurance and real estate are showing a trend of high-speed growth; on the other hand, the real economy is beset by overcapacity, structural imbalances between the supply and demand sides, and other problems. For the time being, enterprises’ financial behaviors are not only reflected in investment in traditional financial assets such as bonds, stocks, real estate held for investment and financial derivatives; more and more enterprises have begun engaging in shadow banking with the extra funds raised and through diverse financing channels. Statistics show, total entrusted loans issued on the Shanghai and Shenzhen stock exchanges in 2015 reached up to RMB3,716 million. General Secretary Xi Jinping stressed in his report at the 19th National Congress of the CPC that “We shall deepen the financial system reform, boost the ability of finance to serve the real economy, optimize the financial regulation system, and firmly safeguard the bottom line of incurring no systemic financial risks.” Therefore, looking into the business model of non-financial enterprises’ shadow banking, its impact on operational risks and the risk transmission mechanism among different areas is of crucial theoretical and empirical significance to preventing the occurrence of systemic risks, facilitating the return of finance’s role to serving the real economy, and curbing the shift from investing in the real economy to investing in the virtual one.
By using the 2004-2015 data about non-financial companies listed on the Shanghai and Shenzhen Stock Exchanges, this paper empirically examines the impact of these companies’ shadow banking business on operational risks, as well as the heterogeneous impact of such business on operational risks among enterprises with varied degrees of financing constraint and differences in corporate governance. Then it further probes into the transmission mechanism of these companies’ shadow banking on operational risks under different business models. Finally, it puts forward the policy advice of curbing excessive financialization of non-financial enterprises at the source, reducing systemic risks and preventing the shift from investing in the real economy to investing in the virtual one. Compared with existing studies, the paper has mainly made the following contributions: First, it divides non-financial enterprises into two different business models based on the criterion of whether they directly create credit, and comes up with the estimation method for shadow banking scale under the two business models from a micro perspective. Second, it analyzes the impact of non-financial enterprises’ shadow banking on operational risks at the theoretical and empirical level, as well as the transmission mechanism of such shadow banking on operational risks under different business models.
Then it reaches the following conclusions: First, shadow banking of non-financial enterprises will exacerbate operational risks, with such effect more evident among enterprises with higher degrees of financing constraint and poor corporate governance efficiency. Second, if an enterprise plays the substantive role of credit intermediary and provides funding to SMEs, the potential repayment risk of borrowers will be transmitted to the lender through the accounting mechanism. Third, if an enterprise engages in shadow banking by indirectly participating in the shadow credit market, volatility of the financial market will increase fluctuations of expected earnings and aggravate operational risks through the “linkage of systemic risks”.
Finally, the paper offers the following policy advance: First, eliminate the imbalances and low efficiency of fund allocation to enterprises with financing advantages and disadvantages caused by banks’ credit discrimination approaches, vigorously develop the capital market for direct financing, and provide more equal and extensive opportunities to access financial services to SMEs with relatively high degrees of financing constraint so as to rein in excessive shadow banking of non-financial enterprises. Second, strengthen functional financial regulation and enhance the transparency of listed companies’ financial statements to avoid continuous risk accumulation as enterprises conduct shadow banking through underground financing and other non-compliant channels. Third, improve the physical investment environment, accelerate the disposal of zombie enterprises, promote the upgrading of industrial structure, encourage innovation among enterprises, and guide the economic activity center of enterprises to return from financial profit seeking to production and operation activities.