【Abstract】

This paper studies systemic risk in the Chinese debt market stemming from inter-corporate loan guarantees using field data from Zhejiang Province. We apply a weighted and directed network model to analyse the implications for default contagion and systemic risk under different stress testing scenarios. The empirical results indicate that the topology of the loan guarantee network is close to a ‘scale-free’ structure, which is known to be robust against accidental failures but vulnerable to coordinated attacks. Hence, the network is able to cope with idiosyncratic shocks resulting from single company failures, but can easily suffer from more widespread contagion if a group of systemically important companies are hit by a targeted shock. We further demonstrate that within our sample of small and medium-sized enterprise (SME) companies, increasing leverage reduces network stability and exacerbates the effects of contagion. More lenient bank lending policies increase the survival rate of sample companies and thereby reduce the losses from default contagion.

【Keywords】

Loan guarantee network; SMEs financing; Default contagion; Systemic risk; Stress testing

【Authors】

Li Wenwei, Shanghai Gold Exchange; School of Management, Fudan University, Shanghai, China

Ben Shenglin, Co-Director of IMI; Dean of International Business School, Zhejiang University

Ulrich Hommel, Department of Finance & Accounting, EBS Universit€at f€ur Wirtschaft und Recht, Wiesbaden, Germany

Sandra Paterlini, Department of Management and Economics, University of Trento

Yu Jiefang, Research Fellow of IMI; School of Economics, Zhejiang University