Choice of corporate debt in China: The role of state ownership

- We analyse the choice of debt for Chinese firms between bonds and syndicated loans.
- This issue helps appraise the weak development of bond market in China.
- We check if debt choice is politically or economically driven.
- Central state ownership is a key determinant of preferring the bond market.
- Financial factors play a minor role in debt choice compared to other countries.

We analyze the factors affecting the decisions of Chinese firms to take on debt in the form of either bonds or syndicated loans over the period of 2006-2010. The study reveals the extent to which corporate debt choices are politically or economically driven. We test if central government ownership, flotation costs, asymmetries of information, and renegotiation and liquidation costs influence the choice of debt. We find evidence in favor of the influence of central government ownership on the financing choices of firms because Central State owned firms are more likely to issue bonds and to borrow uniquely on the bond market, rather than tapping both debt markets. Overall, our findings show that financial factors play a much more minor role in corporate debt choices compared to other countries, whereas central government ownership is a key determinant of preference for the bond market.