Deleveraging, Accounting Policy Choice And Financial Instrument Innovation

After 2008,China's non-financial sector has obvious momentum of adding leverage,and the leverage ratio of non-financial enterprises is at a high level in the world.In order to deal with the possible risks of high leverage,since 2015,relevant departments of the Chinese government have clearly deployed the priorities and requirements of deleveraging through a series of meetings and documents.Among them,state-owned enterprises,especially those in the non-financial sector,bear more pressure of deleveraging in this round due to their reality of high leverage and their important position in national economic construction.In this context,the state-owned enterprises,in combination with their own situation,have taken a variety of different ways to try to deleverage.Since it entered China's domestic market in 2013,the perpetual bond has been issued in a small scale and in a small quantity for a long time due to its relatively high issuance cost and poor market response compared with ordinary bonds.However,according to the current accounting standards,perpetual debt can be recognized as an equity instrument through the setting of relevant provisions.Therefore,enterprises can adjust the number of equity instruments by issuing perpetual debt to achieve the goal of deleveraging.Under the background of deleveraging,the new financial instrument of perpetual debt has developed rapidly.From the perspective of regulation and contract innovation in property rights economics,this paper theoretically explains the behavior of state-owned enterprises issuing perpetual debt under the background of deleveraging.Property rights economics discusses that regulation will restrict the existing transactions and contracts of enterprises and harm the interests of the existing traders in the market.However,since regulation is not comprehensive and can only control the space that it can limit,it provides opportunities for contract innovation in the space that regulation cannot cover.However,innovations in trading or contracts bring new transaction costs.Deleveraging regulation has put enormous pressure on highly leveraged state-owned enterprises.Deleveraging controls break up existing or potential debt financing contracts for soes,forcing debtors to seek new forms of deals and contracts.Since the regulation of deleveraging requires more constraints on the accounting figure of leverage ratio,and the pure deleveraging does not regulate the generation process of accounting information and the trading process behind accounting information,state-owned enterprises can make use of the existing space for trading and contract innovation.In this case,the accounting standards on the classification of financial instruments with equity characteristics provide an opportunity for these state-owned enterprises to issue financial instruments with equity characteristics to deleverage.On this basis,as a typical financial instrument with equity characteristics,perpetual debt has been selected by some state-owned enterprises as a deleveraging tool,and has been developed in China's domestic market.Through the analysis of the issuance and redemption process of China railway construction perpetual bonds,this paper finds that China railway construction has conducted a relatively large scale of perpetual bonds issuance from 2016 to 2019.This is because China railway construction has a high leverage ratio,so the need for deleveraging is urgent.At the same time,constrained by its own operating conditions and solvency,it cannot use direct debt repayment to deleverage.Therefore,China railway construction needs a new financing method to meet the government's supervision of the accounting figure of leverage ratio.Considering its own development needs,China railway construction chose to issue perpetual debt to deleverage.By means of renewal options and deferred interest clauses,perpetual bonds avoid the obligation to deliver cash or other financial instruments to other parties when not settled in their own equity instruments or under potentially adverse conditions,thereby realizing the recognition of equity instruments.However,compared with debt financing,perpetual bonds have higher financing costs,which also indicates that transaction costs will inevitably increase in the process of contract innovation.From the perspective of issuing consequences,the issuance of perpetual debt reduced the asset-liability ratio of China railway construction,and from the perspective of accounting figures,it fulfilled the purpose of supervision.However,since the issuing interest rate of perpetual bonds is higher than that of ordinary bonds,and there is no tax shield effect of ordinary bonds,the financing cost of enterprises increases,objectively resulting in the transaction cost of contract innovation.At the same time,calculate discovery CRCC no bigger funding needs,so its sustainable debt to leverage,more is to use accounting standards leveraged management space,the lack of substantial economic effect,neither reduce the economic burden of the enterprise,no vitality,mobilize the production and operation of an enterprise to improve enterprise's operating conditions.Therefore,the issuance of perpetual bonds in China railway construction is just a pandering to the regulation,which does not reduce the debt burden of China railway construction in a real sense,nor improve the operation,so it does not fundamentally achieve the purpose of deleveraging.