This paper examines the impact of collateral shocks on corporate financialization using a sample of Chinese-listed firms from 2008 to 2021. We find a statistically and economically significant positive effect of collateral appreciation on financialization, consistent with profit-chasing motives, even after addressing endogeneity concerns. Additional tests reveal the effects are more pronounced among financially constrained, bank-dependent, and high-agency-cost firms. Financialization also elevates the risktaking and financial risks of firms. Overall, we provide novel evidence that collateral shocks stimulate corporate financialization, with implications for incentives, regulation, and systemic risk monitoring.

We show that government deleveraging causes corporate distress in a distorted financial market. Our difference-in-differences analysis exploits China’s top-down deleveraging policy in 2017, which reduces local governments’ borrowing capacity through shadow bank financing. Private firms with government procurement contracts experience larger accounts receivable increases, larger cash holdings reductions, and higher external financing costs. These firms also experienced greater likelihoods of ownership changes and deteriorated performance. Effects are muted for state-owned enterprises, which enjoy funding privileges in China’s financial system. Our paper thus reveals a novel channel of allocation inefficiencies where government deleveraging amplifies adverse impacts of financial distortions.

We study the consequences of market uncertainty on international trade. An increase in foreign market uncertainty dampens China's aggregate exports on both the extensive and intensive margins. The adverse effects are more pronounced in industries facing tighter financial constraints than in others. We propose a dynamic trade model to explain the facts. Greater uncertainty depresses a firm's expected value of exporting and borrowing capacity, leading to fewer exporters and a smaller average size of exports. Under calibrated parameters, the uncertainty shock accounts for a sizable fraction of China's trade collapse in the 2008 financial crisis and the recent trade war.

Based on a DSGE model embedded with a stock market, we inspect interconnection between China's financial markets and macroeconomic cycles. We find consumption, investment and capacity utilization display significant and positive responses to stock market booms triggered by financial and confidence shocks, however, inflation responds insignificantly. We perceive a counteractive and significant reaction of China's monetary policy rule to credit-to-GDP gap at business cycle frequency. We decompose stock price into fundamental value influenced by the financial shock and speculative bubble driven by the confidence shock, and the confidence shock's contribution to stock price fluctuations is estimated to be about 14.8%. Model validation based on the DSGE-VAR framework indicates no serious structural model misspecification.