{
  "title": "Assessing Default Risks for Chinese Firms: A Lost Cause?",
  "publication": "IMF Working Papers, June 26, 2015",
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  "summary": "Assessing default risks for Chinese firms is hard. Standard measures of risk using market indicators may be unreliable because of implicit guarantees, the large role played by less-informed investors, and other market imperfections.",
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    {
      "heading": "Summary",
      "content": "- Assessing default risks for Chinese firms is hard.\n- Standard measures of risk using market indicators may be unreliable because of implicit guarantees, the large role played by less-informed investors, and other market imperfections.\n- The authors estimate stand-alone 1-year default probabilities for non-financial firms in China using an equity-based structural model and debt costs.\n- Key conclusion: For individual firms, equity-based measures, while far from perfect, provide a better measure of stand-alone default risks than borrowing costs."
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    {
      "heading": "Methodology",
      "content": "- Estimated stand-alone 1-year default probabilities for non-financial firms in China.\n- Two approaches compared:\n  - An equity-based structural model.\n  - Measures based on debt costs."
    },
    {
      "heading": "Key Findings",
      "content": "- Equity-measure sensitivity:\n  - The equity measure of default risk is sensitive to a firm’s balance sheet health, profitability, and ownership.\n  - Default probabilities are higher for weaker, less profitable, and state-owned firms.\n- Debt-cost measures:\n  - Measures based on the cost of debt seem largely detached from fundamentals.\n  - Debt-cost measures appear instead determined by implicit guarantees."
    },
    {
      "heading": "Policy Implications / Interpretation",
      "content": "- Implicit guarantees and market imperfections can make borrowing costs an unreliable indicator of firm-specific default risk in China.\n- Equity-based measures capture firm fundamentals better than borrowing costs and therefore are preferred when assessing stand-alone default risks for individual firms, despite imperfections.\n\n---\n\n Content in this bundle\n\n- wp15140\n  - wp15140 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp15140 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/assessing-default-risks-for-chinese-firms-a-lost-cause-43034"
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    "Authors: Daniel Law, Shaun K. Roache",
    "Published: June 26, 2015",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513597584.001",
    "Assessing default risks for Chinese firms is hard.",
    "Standard measures of risk using market indicators may be unreliable because of implicit guarantees, the large role played by less-informed investors, and other market imperfections.",
    "The authors estimate stand-alone 1-year default probabilities for non-financial firms in China using an equity-based structural model and debt costs.",
    "Key conclusion: For individual firms, equity-based measures, while far from perfect, provide a better measure of stand-alone default risks than borrowing costs.",
    "Estimated stand-alone 1-year default probabilities for non-financial firms in China.",
    "Two approaches compared:",
    "Equity-measure sensitivity:",
    "Debt-cost measures:",
    "Implicit guarantees and market imperfections can make borrowing costs an unreliable indicator of firm-specific default risk in China.",
    "Equity-based measures capture firm fundamentals better than borrowing costs and therefore are preferred when assessing stand-alone default risks for individual firms, despite imperfections.",
    "**_wp15140**"
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