We investigate how marginal corporate tax rate affects corporate policy changes in response to a regulatory credit crunch. With a surge in debt due to a fiscal stimulus after 2008, the Chinese government rolled out the “deleveraging” program in 2015 which, through tightening monetary policies, restricting credit flows, and regulating shadow banks, significantly increased firms’ cost of debt and the incentive to deleverage. With a difference-in-differences design, we find that high-tax-rate firms reduce leverage to a less extent than low-tax-rate firms after the initiation of the deleveraging program. This effect is stronger in non-state-owned firms and firms with less non-debt tax shields. More importantly, through retaining more debt, high-tax-rate firms reduce dividend and switch to equity financing to a less extent, and also cut less investments in fixed assets, R&D and human capital. We conclude that tax constitutes an important factor in shaping the micro-economic consequences of a credit crunch.

There are many similarities between the US, the UK and the Chinese housing markets, including the movements of interest rates and house prices. Some Chinese banks, especially the Bank of China, have been exposed to the US mortgage securitization market. These have triggered a serious concern as to whether the US credit crunch and housing market crisis may be replicated in China. This paper shows that there are some significant differences between China and the West, especially the US and the UK. Compared with the US and other western industrialized economies, the booming house market in China has been supported by fast economic growth, rapid urbanization and high domestic savings. In addition, Chinese banks are less exposed to mortgage defaults than their western counterparts because house buyers are mainly urban and high income residents who are required to have high down payments. These Sino-Western economic and social differences suggest that the US credit crunch and housing market crisis may have some negative impacts on Chinese commercial banks and the overall economy but are unlikely to cause a similar financial and housing crisis in China despite the current struggling Chinese stock markets and a slowdown of house price growth.

This paper develops a model of private debt financing under inefficient financial intermediation. It suggests a mechanism that can generate the following sequence of events observed in the recent Asian crisis: A period of relatively low capital flow despite a steady improvement in economic fundamentals (capital inflow inertia), followed by a fast buildup of capital inflow, and ended with a large capital outflow and domestic credit crunch. Unlike other models requiring large movements in fundamentals or asset prices to explain a financial crisis, this model can exhibit large credit/capital flow swings with moderate changes in the economic and market environment.