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Вестник Томского государственного университета. Экономика. 2023. № 61. С. 136-151. Tomsk State University Journal of Economics. 2023. 61. рр. 136-151.
Original article UDC 08.00.10
doi: 10.17223/19988648/61/9
Interest rate liberalization and debt risk in China
Song Yuxuan1, Gao Yan2
1 Saint Petersburg State University, Saint Petersburg, Russian Federation, 1056022128@qq.com 2 JiningMedical University, Jining, China, 1056022128@qq.com
Abstract. Interest rate liberalization, which will have a multi-impact on the economy in the process of marketization, especially on the macro-debt market, is a requirement to develop the market economy. It is a current important economic topic that the risk control of the macro-debt market is related to the healthy degree of the economic development after the debt financing leverage turns to assets investment, and the study around these contents should be a cause for concern. As an important component of deepening financial reforms, the effect of interest rate liberalization on owners' operations and management behavior of a micro-enterprise is prominent; on the other hand, the continuous climbing debt risk of local government will affect the financial decisions and implementation effect of enterprises by spillover effect. We made an empirical research on the extent of interest rate liberalization in China integrating relevant modes with the statistical data of PBC and our nation. Research on the reform in the Chinese financial market showed that prompting the reform of interest rate liberalization can obviously increase enterprises' financing capabilities which will be restrained by the aggravation of the local government's debt risk, and the significant enhancement of it enhances the impetus to enterprises' financing capabilities from interest rate liberalization.
Keywords: interest rate, China's debt, risk management, China's financial system, liberalization, marketization, China's financial reform, financial risk
For citation: Song Yuxuan & Gao Yan. (2023) Interest rate liberalization and debt risk in China. Vestnik Tomskogo gosudarstvennogo universiteta. Ekonomika - Tomsk State University Journal of Economics. 61. pp. 136-151. doi: 10.17223/19988648/61/9
Preface
China's national economy grew rapidly in the process of economic globalization after we joined the WTO, and our economic potential was developed after participating in international trade and technological transformation. The growth of disposable income stimulates the need for market-based investment assets to a great extent. But, in a short time, China's financial market is not mature enough: its relatively few kinds of financial products cannot satisfy customers' rapidly growing needs, there is a relative lack of products that are available for investors, the asset price inflated under the situation of the increasing supply relationship which cannot reflect the real value of it, and then formed the asset bubble [1, 2]. China is also facilitating the opening of the financial market, re-
© Song Yuxuan, Gao Yan, 2023
forming the interest rate liberalization gradually; opening currency and bond markets step by step; allowing deposit and loan interest rates to have a limited fluctuation; permitting foreign capital to have shares in bond companies, banks, and other financial institutes while enlarging the opening of domestic commodity market, and then raise the opening degree of the financial market to foreign investment and totally deregulate the loan interest rate [3, 4].
During the previous period, Chinese enterprises obtained much capital from domestic financial institutions, purchased massive foreign assets, and formed a huge debt system of enterprises with a loose domestic financing environment. Meanwhile, the investment vehicle taking real estate as the representation also attracts residents and other private sectors' investment and increases the resident debt efficiently.
The government expands its investment scale year by year, borrows money from banks, and releases long-term bonds with cities' investment companies and other platforms to stimulate economic growth, which made the rapid growth of the government's debt scale and the rapid development of local governments' financing platform. Local governments are more positive to borrow money, which therefore leads to the rapidly growing leverage ratio of Chinese local governments below the provincial level [5, 6]. Chinese financial institutions release financial bonds for major capital projects to serve the real economy and coordinate with our country's construction of the main fundamental facilities, which push the long-term growth of China's economy effectively, and financial departments' debt ratio is rising quickly.
In the Chinese financial market, the debt of residents, governments, enterprises, and financial institutions together make up the Chinese debt system, the debt risk of the four departments also transmits mutually, and the rapidly rising debt ratio raises possibilities of systematic debt risk. The current situation of Chinese economic development indicates that the debt risk in the real economy will ultimately impact the capital safety of financial institutions, the happening of economy's systematic debt risk will also erupt as a form of the financial market's debt risk [7, 8].
The reform process of China's interest rate liberalization
With the quick increase in the Chinese economy, the regulatory measures of interest rates limit capital market development and restrain the economic growth rate. With the impacts of the low speed of economic globalization's development, the escalating of Sino-US trade frictions, the misappropriation of regional trade protectionism measures, and other factors, China's economic growth and its capital market withstand immense domestic and foreign pressure. It is crucial for Chinese financial market to speed up the promotion of interest rate liberalization and reduce the risk of debt market efficiently [9, 10].
While interest rate liberalization reform, which needs the protection of a stable macro-economic environment, involves interests of various aspects, the overheated economy will raise the interest rate, cause the market entities' com-
petition for capital, seduce excessive needs for capital, and inspire inflation [9]. On the contrary, economic depression may cause too high financing costs for real businesses, the debt covers the operational profit, the credit risks of banks are high; the property prices declined, the bankruptcy risk of enterprises and banks increased and induced systematic financial risk [11].
China adopted a gradual path, which first opens the money market and interest rate controls for the bonds market, then realizes the marketization of deposit and loan interest rates progressively according to the experience of interest-rate reforms in developed countries.
China set up a unified interbank borrowing market among banks in 1996, which allows both sides to decide on the rate of the interbank borrowing market among banks independently based on the supply and demand situation of the funds. This is also a symbol of starting the interest rate liberalization reform. At the same time, the Ministry of Finance released market-oriented bonds successfully depending on the Stock Exchange and adopting numerous issuance methods. PBC activated the repurchasing business of bonds among banks and liberalized the control of existing bonds' transaction prices and repo rates on the national unified interbank borrowing market in 1997 [12]. The China Development Bank sold financial bonds by public bidding firstly relying on the bond issue system of PBC in 1998, the Export-Import Bank of China sold financial bonds publicly in a similar way, policy banks and other financial institutes selling bonds publicly by market-oriented interest rate became a new financing way [13]. MOF began to sell national debt publicly by interest rate bidding in 1999. In 2020 the Chinese government started the marketization reform of deposit and loan interest rates, and in 2004 it canceled the controlling measures of deposit and loan interest rates of all foreign currencies [14].
PBC normally regarded the interbank interest rate as the benchmark interest rate of the market among banks in Shanghai in 2007 with 10 years of exploration and development, which propelled the further interest rate liberalization reform whose most basic symbol is the deposit and loan interest rate liberalization [15]. The control of local currency loan interest rates was fully liberalized in 2013, which basically realized the reform target of loan interest rates liberalization [10]. PBC controlled the upper limit of the fluctuation in 2015, which marks our country realized the reform target of interest rate liberalization [16].
PBC planned to totally open the limit of broker-dealer shareholding within 3 years in 2018. China took measures to deepen liberalizing finance and the modern service industry, which advanced removing limitations of foreign investment proportion of securities, futures, and life insurance below 51% in 2020. Then China fully opened the financial market in 2020; there is no limitation to the shareholding ratio of foreign investment to security companies, funds, and futures [2, 17]. China allowed investors of qualified foreign institutions, including foreign central banks, sovereign funds, commercial banks, and pension funds, to invest in securities in China's foreign exchange market in June 2022. Overseas financial institutions can trade securities, investing derivatives, and other financial instruments permitted by PBC and the China Securities Regulatory Com-
mission from 30 June 2022, the target of interest rate liberalization of the financial market and opening the securities market completely in China was reached.
Evaluation variables and data selection of China's interest rate liberalization
China's interest rate marketization reform specifically includes interest rate liberalization process of the money market, bond market, and deposits and loans of financial institutions. Chinese scholars Tao Xionghua and Chen Mingjue chose statistical indicators such as the floating range and scope of interest rates, the decision form of interest rate, the size of the real interest rate, and so on to measure the interest rate marketization, but the scholar Peng Yingqi believes that there is some overlap between the first two indicators, which essentially both reflect the control degree of official interest rates, so she constructed the index of the interest rate floating range based on other scholars' research results [10, 11].
The benchmark interest rate and the floating range of interest rates determine the interest rate marketization degree according to relevant scholars' research and the practical experience of China's financial market, so the liberalization of the real interest rate and the interest rate floating range are selected as the research variable in the research process of measuring the interest rate marketiza-tion level in China. If the formation of the benchmark interest rate depends entirely on the supply and demand sides of funds in the market, the real interest rate will be consistent with the benchmark interest rate in businesses of China's financial market. The larger the range of interest rate fluctuations the financial regulatory authorities allow and the fewer control measures they take, the higher the marketization degree of interest rates will be.
The interest rate classification in financial markets of PBC was used in this article in order to effectively measure the research variables, and the control or determination level to different interest rate fluctuations of PBC was analyzed according to its control of interest rate fluctuations.
Based on factors such as changes in interest rates and real interest rates in China's money market, bond market, and interbank market, this article selected the data of China's interest rate index changes from 2000 to 2020 for analysis, and the research data is from the China Financial Yearbook, the database of the National Data, and the database of PBC [17].
Research methods and models
In this article, the index of real interest rate level and the fluctuation of interest rate are selected to calculate the selected research variables. The method of the fuzzy comprehensive evaluation is selected to easily quantify the market-oriented level of interest rate represented by the annual real interest rate, and the difference between the interest rate of a one-year deposit and the inflation rate is used as the real interest rate level [18, 19]. So we can get specific mathematical expressions:
IRit = INt - Pt (1)
ttjt _ IRt IRmin
IRLt = IR-IR- (2)
IRmax IRmin
IRit is the real interest rate in t year; INt is the nominal interest rate in t year, see the interest rate expression by the one-year deposit; Pt is the inflation rate in t year; IRLt is the level index of the real interest rate in t year; IRmax indicates the maximum level of real interest rates during the 1-t year; IRmin indicates the minimum level of real interest rates during the 1-t year; IRmax — IRmin indicates the level range of real interest rates during the 1-t period.
Since China's reform process of interest rate liberalization has been divided into interest rate reform of the money market, bond market, and financial institutions, the impact of bank deposits and loans on the supply and demand of funds in China's financial system exceeds that of other self-financial markets. Therefore, in the research process, the CNY deposit and loan market is assigned 3, the upper and lower limits of the flexibility in the market of deposit and loan interest rates are assigned 1.5, and other financial submarkets are assigned 1, and the weights of each financial market segment are assigned as shown in Table 1.
Table 1. Variable and variable assignment list
Money market Bond market Financial institution
Name Interbank Lending Bill Discounting Bond Buybacks Short-Term Treasury Bills Enterprise Bond Financial Bond Long-Term Treasury Bills Foreign Currency Deposit Foreign Currency Deposit Foreign Currency Loan RMB Deposit
Segment financial markets (Lr) Li L2 L3 L4 L5 L6 L7 l8 L9 L10 L11
Initial assignment 1 1 1 1 1 1 1 1 1 3 3
Weighting (Wr) 1/15 1/15 1/15 1/15 1/15 1/15 1/15 1/15 1/15 1/15 1/15
Source: databases of PBC and national data.
Based on Table 1, the natural exponential function is constructed as a mathematical expression to measure the floating level index of the interest rate of the submarket.
1
Lrt = 1 (3)
IRLft = Ir1=1iLrtWr (4)
Lr is the r financial market segment; Lrt - Lr is the free-floating index of year t; uprt - limrt- Lr is the upper limit of floating of interest rate; lowrt — limrt- Lr is the lower limit of floating of interest rate; IRLft is the floating index of interest rate in year t; W; - Lr's weighting.
From equation (3), it can be seen that when the upper and lower fluctuation ranges of interest rates in the market segment are both 0, the floating range index of interest rates in the market segment is 0. When the range of interest rate fluctuations in the market segment is infinite, the interest rate fluctuation index of the segment is 1. From equation (4), it can be seen that the range of interest rate floating range index in year t is [0.1].
The real interest rate level index and the interest rate fluctuation range index together determine the interest rate market-oriented composite index. The real interest rate level index reflects the degree to which the benchmark interest rate level matches the marketization, and has a positive correlation with the degree of interest rate marketization. At the same time, the interest rate floating index reflects the degree to which the Chinese People's Bank of China restricts interest rate changes, the higher the interest rate floating index, the higher the degree of interest rate marketization, and the interest rate floating index is also positively correlated with the level of interest rate marketization.
In order to maximize the information contained in the index, we use the simple averaging method to synthesize the two indices as an interest rate market-oriented composite index that measures the market-oriented interest rate, so that we can obtain an interest rate market-oriented composite index with an annual value between 0 and 1. Thus, a calculated model of the Synthetic Interest Rate Marketization Composite Index (IRLt) can be obtained (5):
IRLst = 1(IRLt + IRLft) (5)
IRLst is the composite index of interest rate marketization in year t; IRLt is the level index of the real interest rate in year t; IRLft is the floating index of interest rate in year t.
At the same time, it is assumed that the degree of complete marketization of interest rates is 1, the marketization degree of fully controlling interest rates is 0, and the range of values for changes in index values is between 0 and 1. Taking into account the influence of monetary policy changes, the benchmark interest rate will be adjusted within one year, and, in the research process, the benchmark interest rate after the last adjustment of the current year is used as the one-year deposit rate to evaluate the real interest rate level index.
Empirical analysis on results of the level of interest rate marketization in China
According to the data released by PBC and financial departments, we calculated the inflation rate of the one-year interest rate of fixed deposits in China from 2002 to 2021, and calculated the real interest rate and the level index of real interest rate on this basis, as shown in Table 2. Obviously, even though there are fluctuations in the level of China's interest rate over the past 20 years, on the whole, it has kept transitioning stably, and China's interest rates and real interest rates have maintained a slow decline since 2011.
Table 2. The fluctuations of the level index and influencing factors of China's real interest rate from 2002 to 2021
Year One-Year Interest Rate of Fixed Deposit (%) Inflation Rate (%) Real Interest Rate (%) Level Index of Real Interest Rate
2002 1.980 -0.8 2.78 0.7813
2003 1.980 1.2 0.78 0.5383
2004 2.250 3.9 -1.65 0.2430
2005 2.250 1.8 0.45 0.4982
2006 2.520 1.5 1.02 0.5674
2007 4.140 4.8 -0.66 0.3633
2008 2.250 5.9 -3.65 0.0000
2009 2.250 -0.7 2.95 0.8019
2010 2.750 3.3 -0.55 0.3737
2011 3.500 5.4 -1.90 0.2126
2012 3.000 2.6 0.40 0.4921
2013 3.000 2.6 0.40 0.4921
2014 2.750 2.6 0.75 0.5346
2015 1.500 1.4 0.10 0.4557
2016 1.500 2.0 -0.50 0.0677
2017 1.500 1.6 -0.10 0.4121
2018 1.500 2.1 -0.60 0.4743
2019 1.300 2.9 -1.60 0.3188
2020 1.500 2.5 -1.00 0.9565
2021 1.500 0.9 0.60 0.6610
Source: databases of PBC and national data
Table 3 shows the fluctuations of the floating index of interest rates influenced together by the money market, bond market, and banking and financial institutions, we can see that there are only slight fluctuations in Interest rates of China's money and bond markets from 2002 to 2021, and the floating index of interest rate was mainly affected by fluctuations in interest rates at banking institutions. This also indicates that the main factors influencing the marketization of interest rates in China are banks and other financial institutions, and China's floating index of interest rate has been significantly improved, which indicates that regulators and monetary authorities allow financial markets to price funds to
a higher degree through market competition. Since 2015, the floating index of interest rate in China's financial market has remained above 0.97, and the government, which affects the financial market mainly by relying on market-oriented measures, has continuously weakened its administrative intervention in the financial market.
Table 3. Changes in China's floating index and influencing factors of interest rate from 2002 to 2021
Year Money Market Bond Market Banking Institutions Floating Index of Interest Rate
2002 0.231 0.171 0.104 0.506
2003 0.231 0.171 0.120 0.522
2004 0.231 0.171 0.330 0.732
2005 0.231 0.171 0.330 0.732
2006 0.232 0.171 0.331 0.735
2007 0.232 0.171 0.331 0.735
2008 0.232 0.171 0.332 0.736
2009 0.233 0.171 0.332 0.737
2010 0.233 0.172 0.332 0.737
2011 0.233 0.172 0.337 0.742
2012 0.233 0.172 0.337 0.742
2013 0.267 0.172 0.433 0.872
2014 0.267 0.172 0.434 0.873
2015 0.267 0.172 0.531 0.970
2016 0.267 0.172 0.531 0.970
2017 0.267 0.173 0.531 0.971
2018 0.268 0.174 0.533 0.975
2019 0.268 0.175 0.533 0.976
2020 0.269 0.176 0.534 0.979
2021 0.269 0.176 0.534 0.979
Source of data: Compiled by the author.
Although China deregulated the floating of deposit and loan interest rates in 2015, the degree of interest rate liberalization has not increased significantly from the measurement results of it, mainly because China's current interest rate implements a dual-track system, and the benchmark interest rate of deposits and loans is still determined by PBC.
Table 4 shows the changes in the composite index of China's interest rate marketization from 2002 to 2021, under the influence of real interest rates and interest rate floating changes, the changing trend of the composite index of the interest rate marketization is not fixed, but fluctuating, and the fluctuation range is increasing persistently.
The study found that interest rate control is a key factor for non-state-owned enterprises to face problems that financing was inaccessible and unaffordable which led to a large number of high-quality credit funds flowing into state-owned listed enterprises, mainly because banks and other financial institutions lack independent pricing power under interest rate control which is easy to form
systemic risks, so there will be more funds injected into state-owned enterprises or large enterprises with high protection capacity which will aggravate the degree of resource misallocation in the financial market, and it is detrimental to the healthy development of the market [3].
Table 4. Composite index of China's interest rate marketization from 2002 to 2021
Year Level Index of Real Interest Rate Floating Range Index of Interest Rate Composite Index of Interest Rate Marketization
2002 0.781 0.506 0.644
2003 0.538 0.522 0.530
2004 0.243 0.732 0.488
2005 0.498 0.732 0.615
2006 0.567 0.735 0.651
2007 0.363 0.735 0.549
2008 0.000 0.736 0.368
2009 0.802 0.737 0.769
2010 0.374 0.737 0.556
2011 0.213 0.742 0.477
2012 0.492 0.742 0.617
2013 0.492 0.872 0.682
2014 0.535 0.873 0.704
2015 0.456 0.970 0.713
2016 0.068 0.970 0.519
2017 0.412 0.971 0.691
2018 0.474 0.975 0.725
2019 0.319 0.976 0.648
2020 0.956 0.979 0.968
2021 0.661 0.979 0.820
Source: Compiled by the author.
The reform of the interest rate marketization is essential to leave the capital allocation right and pricing power in the financial market to be determined by the supply and demand of funds in the market, that is to say, the enterprise with better profitability capacity and better quality disclosed by accounting information will be better supported by financial institutions after putting forward financing demands, which is specifically manifested in lower financing costs and a more reasonable structure of financing period. Thus, interest rate market-ization reform can have a better guiding effect on the financial market and inject more high-quality funds into high-quality enterprises with more growth to better allocate fund [15, 20].
In the reform of the interest rate marketization, banks and other financial institutions will use more capital for high-risk and high-yield enterprises under the pressure of fierce competition, in the meantime, after the lower limit of loan interest rates is liberalized under interest rate liberalization, the attraction of state-owned enterprises or large enterprises will be significantly reduced to banks and other financial institutions, which will prompt financial institutions to inject
more capital into non-state-owned enterprises or small and medium-sized enterprises, and provide enterprises with more flexible and independent financing products through product innovation and other means, and the financing ability of enterprises will be significantly improved under the joint action of many aspects [21].
The continuous advancement of the reform of interest rate marketization puts forward higher standards and requirements for enterprises' accounting information disclosure, capital allocation efficiency, and many other aspects, and effectively alleviates the information asymmetry in the market, and financial institutions can formulate more reasonable financing strategies based on high-quality accounting information to avoid uncertainty and high risks effectively, and then inject more high-quality funds into entity enterprises [16, 22].
As an important part of deepening financial reform, interest rate marketiza-tion can effectively improve the unbalanced credit and other problems formed under interest rate control to make various enterprises obtain a relatively fair financing environment. At the same time, it can also integrate more high-quality private funds into the entire financial market, provide more adequate financing support for enterprises, and introduce a more effective mechanism for debt governance.
We can see from Table 1 that the main influencing factor of the interest rate marketization index fluctuation is the fluctuation of the real interest rate level index, which shows that, since the benchmark interest rate of deposits and loans is still controlled by PBC, the level of the real interest rate cannot really play the financial market regulation effect in economic development, that is also the reason why China fully liberalizes the financial market and gives foreign-funded financial enterprises a larger operational scope, and Chinese government intensifies the competition in its own financial market and reduces capital costs by opening up more fields to introduce foreign financial enterprises [4, 23].
1,2
0,8
0,6
£ t - ■ ■ .■J il 1 i
m if Fi iii i 1! 1! il ¡snmi lllillll
^ ^ qnn jy ^ J? qNN ^ ¿P 01>
I Interest rate market index
■Actual interest rate
Figure 1. Composite index
Changes in China's real interest rate and interest rate marketization
At present, a large number of personal funds in China's capital market want capital preservation and appreciation, seeking reliable targets, which will deviate asset prices. The motivations of risk avoidance or speculation aggravate the degree of asset bubbles if external risks have a greater impact on them. In the case of the high debt ratio, asset prices fluctuate sharply and decline, it is easy to produce vicious liquidity crisis and credit risk. What is worse, it will evolve into systemic risk and resulting in a sustainable economic recession and form the financial crisis [24].
In the reform process of the financial market, Chinese society has also completed the transformation of the economy from household savings to debt, and both household debts and the debts of market entities such as governments, enterprises, and so on have increased significantly. As economic growth expectations and the speed of GDP growth are declining, the possibility of shifting from inflation to deflation increases, systemic debt increases, and systematic decline of asset prices will inevitably accelerate the Fei Xue style "debt-deflation" vicious circle of substantial debt burden.
Therefore, the marketization of interest rates cannot be deregulated alone, and it is necessary to establish a market-oriented interest rate system supporting the financial system to effectively affect the economic expectations of market entities, which directly determines the investment willingness, financing ability, and debt repayment ability of market entities in the economic cycle [15, 17].
From a macro point of view, China's debt leverage is higher, asset bubbles are also turning bigger, and prospects of economic profitability are bleak in the expectation of a long-term decline in the growth speed. Enterprises and residents will inevitably reduce their debt burden as much as possible under the expectation that the asset bubble burst will make a rapid increase in debt, take various measures to reduce leverage. The more direct and effective measure is to sell assets, but large-scale asset sales will cause market panic, resulting in rapid depreciation of assets and forming a debt crisis.
Referring to the successful experience of foreign countries, in order to strengthen controlling the debt market's risks and reduce the risks arising from the marketization of interest rates, we must first choose the correct reform path, gradually relax the control degree over interbank lending rates, bill interest rates, and bond interest rates mostly under the control of the monetary management authorities to take the lead in realizing the marketization of money market interest rates [7, 19]. We must guide and regulate the market behavior of commercial banks and other financial institutions, first liberalize loans and then open deposits, financial institutions can independently set the prices of the cost of funds under the premise that costs can be controlled on a priority basis to enhance pricing capabilities and risk identification capabilities, to avoid chaos in the financial market and improve bank profitability [21]. Relating to deposits in financial institutions, the interest rate control of long-term deposits should be opened first, and then the interest rate fluctuations of short-term deposits should
be relaxed to strengthen the monitoring and guidance of deposit liquidity. Considering capital quota management, liquidity control is gradually relaxed to realize the free regulation and control of the market, smoothly realize the market-oriented transition period, reasonably control the mismatch risk of debt allocation of market entities, and optimize the capital allocation.
In addition, the progress of interest rate marketization should also coordinate the relationship with economic structural adjustment, especially the interrelationship between capital account marketization, exchange rate marketization, and the degree of financial business liberalization, and balance international capital liquidity to avoid the impact of short-term arbitrage transactions of capital to the domestic financial system [4].
Discussion
The volume of nonperforming loans in China has grown rapidly since 2015, and the debt default and liquidity risks of small and medium-sized commercial banks are at a high level, which has increased the default risk of banks and other financial institutions in the debt market [17]. Changes in the Sino-US trade war and other external economic environments have led to a rapid decline in profits or even deficits in some enterprises and industries, resulting in difficulties in their capital flow and a reduction in their debt repayment ability and willingness to repay debts. These companies have obtained large amounts of loans from banks in the early stage, or issued corporate bonds in the bond market, so the risk of debt default of the real economy will also be transmitted to the financial market.
China's financial market has successively appeared with the bankruptcy of small and medium-sized banks, the inability to pay corporate bonds on schedule, and other problems since 2019, due to the imperfect governing structure of corporations, subjecting to shareholders and other constraints. Independent operation ability needs to be strengthened, no matter the insurance, fund trust enterprises, or commercial banks have both management and liquidity risks [21]. At the same time, the increase in financial debt and lacking supervision of offbalance-sheet assets to banks by regulatory authorities have a negative impact on the risk control of China's debt market, implementing the interest rate marketization in the case of imperfect deposit insurance systems; immediately abandon the control to capital liquidity, driven by the short-term profit, financial institutions will carry out higher risk operational activities, so when the capital account is opened, it is necessary to strengthen supervision capabilities to prevent excessive international capital speculation from causing the exchange rate to get out of control.
When Chinese commercial banks are resolving non-performing assets, they use measures of the debt-to-equity swap, which has helped many enterprises avoid the risk of debt default, but this method cannot substantially change the enterprises' benefit and does not meet the shareholders' long-term goals. The government's administrative intervention is large in the implementation process,
which does not conform to the law of enterprise market operation making it difficult to withdraw from enterprise equity in the later stage, it may increase the systemic risk of the debt market after implementing interest rate marketization [15, 25]. Moreover, this debt conversion method is generally carried out through government-controlled companies of asset management whose loss is ultimately undertaken by the government's finances, and it remains to be observed whether state-owned enterprises can fundamentally solve the debt crisis by reorganizing enterprises with debt crises.
In fact, the interest rate marketization process is also the deleveraging process of Chinese enterprises, and a successful deleveraging method requires the implementation of reasonable monetary easing, a steady rise in asset prices, a gradual decline in leverage ratios, a steady growth of the economy, and the national economic growth rate higher than the growth of the interest rate.
In the increasingly fierce market competition, financing ability has become the key for enterprises to implement a series of operation and management strategies such as innovation strategy, diversification strategy, and so on. But improving financing ability has become the key to enterprises, which generally face different degrees of financing constraints, in the critical period of economic system transformation. Enterprises are faced with a "dual-track system", a high marketization in money market transmissions and a relatively low marketization of deposit and loan benchmark interest rates such as reverse repo interest rates and other situations under the environment of credit rationing and interest rate restrictions in China, which makes a double distortion of regulating prices and quantities. In this context, the reform of interest rate marketization, which can effectively improve the dual-track system existing in the current financial market, promote the optimal allocation of funds in the entire financial market, and improve the transmission channels' efficiency of monetary policy interest rate, and have an impact on the financing ability of micro-level enterprises, is particularly crucial under this segmentation of the financial market [17].
Conclusion
Direct debt, indirect debt, and economic system debt of China's local governments rise continuously, meanwhile, China's rapid economic development depends on the government's stimulus policies excessively, which shows that the debt risk of local governments has a strong spatial spillover effect, and such a high scale of local governments' debt will have a direct impact on the financing of listed enterprises in them.
In order to obtain better GDP, local governments will attract more enterprises to settle in through large-scale borrowing and provide more financing opportunities for their financial market. However, when the scale of debt is too large or the debt ratio is too high, it will have a strong shock and impact on the stability of their financial market, which made banks and other financial institutions relatively skeptical about the repayment ability of their enterprises and will set higher constraints to restrict the financing of enterprises. That is to say, in areas with
relatively high debt risks, because of high debt ratios, the attractiveness to the financial market and even the entire capital market will be significantly reduced, and governments cannot stimulate banks and other financial institutions to actively participate in the development of real enterprises through policy incentives.
Since the allocation efficiency of considerable high-quality resources is too low, which will aggravate the information asymmetry in the entire market, enterprises lack funds to invest in technological innovation and other high-risk items, while, due to the profit-seeking characteristics of banks and other financial institutions, more funds will be invested in areas with relatively low debt risk, the financing ability of enterprises is greatly suppressed under the spillover effect of local governments' debt risk and lacking guidance ability.
Implementing any policy and its economic consequences will be affected by the environment, and so does the interest rate liberalization, which is an important component of financial market reform. The debt risk of local governments is raising, and the degree of systemic risk banks and other financial institutions faced is increasing significantly, they will protect their own rights and interests by shrinking the monetary base, reducing the scale of loans, and shortening the loan term. Enterprises face inaccessible and unaffordable financing, and other difficulties; in this case, promoting interest rate marketiza-tion makes interest rates determined by the supply and demand of funds in the financial market, that is to say, commercial banks and other financial institutions will invest more high-quality funds in high-risk and high-return enterprises, which have effectively improved the financing constraints of enterprises, and this kind of improvement effect is more significant in small and medium-sized enterprises [7].
On one hand, interest rate marketization can effectively curb excessive investment and other inefficient investment phenomena by improving the corporations' governing effect to retain more free cash flow for enterprises, which means that there is a significant positive correlation between interest rate mar-ketization and cash holdings of corporations [12]. When the debt risk of local governments is relatively high, the high cash holdings formed by the interest rate marketization make enterprises face a lower degree of financing constraints and have better debt repayment ability, and financial institutions such as commercial banks will also cooperate with enterprises by reducing interest rates, and then the financing ability of enterprises will be improved.
On the other hand, enterprises with higher financing ability in the interest rate market-oriented environment often reflect accounting information with higher quality, which means that interest rate marketization will put forward higher standards and requirements for the disclosure quality of enterprises' accounting information, and that will be transmitted to the entire market through the transmission effect of the interest rate [2]. It will be favored by commercial banks and other financial institutions, especially in areas where local governments have relatively high debt risk. As a result, its financing capacity will be enhanced.
The debt risk of local governments has a spatial spillover effect. While improving the degree of freedom in accounting and finance of local governments, it is also necessary to formulate a more normative management and assessment mechanism, take multiple measures to effectively reduce debt risks of local governments, and fully develop governments' macro-adjustment in the entire market deepening the market-oriented reform of interest rates to provide the most solid guarantee for improving the financial market and expanding enterprises' financing channels. The reform of interest rate liberalization will create the illusion of rising financing costs in a short period, so relevant departments of government should actively guide and relax the regulation of local finance to let market mechanisms make a difference to the fullest extent.
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Information about the authors:
Song Yuxuan, Saint Petersburg State University (Saint Petersburg, Russian Federation). E-mail: songyuxuan_0225@163.com
Gao Yan, associate professor, Jining Medical University (Jining, China). E-mail: 1056022128@qq.com
The authors declare no conflicts of interests.
The article was submitted 02.01.2023; approved after reviewing 13.02.2023; accepted for publication 21.02.2023.
