The Double-Edged Sword: How Corporate Financialization Impacts Main Business Performance in China

The Rise of Financialization in Chinese Enterprises

China's financial sector has boomed in recent years, but this growth has sparked concerns about the increasing financialization of non-financial companies. Driven by low returns on core business investments and the allure of high-yield financial instruments, many companies have shifted their focus to financial activities. This trend raises a critical question: does financialization help or hinder a company's core business?

A Delicate Balance: The Threshold Effect

New research tackles this question head-on, revealing a dynamic and non-linear relationship between financialization and core business performance. Using a dynamic panel threshold model and data from Chinese A-share listed companies (excluding financial and real estate firms) between 2013 and 2022, the study uncovered a crucial threshold.

Up to a financialization level of 5.82% (measured as the ratio of financial assets to total assets), increasing financial activities actually boosts core business performance. This suggests that judicious financial asset allocation can act as a "reservoir," providing resources for growth and weathering economic uncertainties.

However, beyond this 5.82% tipping point, the story changes. Increased financialization begins to negatively impact core business performance. The allure of short-term gains from financial markets can lead to a "crowding out" effect, diverting resources away from crucial investments in research, development, and core operations.

Beyond the Numbers: Real-World Examples

This threshold effect plays out in real-world scenarios. Consider Huawei, a company known for its conservative financial approach. By strategically investing in low-risk assets like treasury bonds, Huawei ensures financial stability and fuels long-term growth. Conversely, Yunnan Baiyao’s foray into high-risk financial products resulted in significant losses, demonstrating the dangers of excessive financialization.

Unveiling the Nuances: Heterogeneity Across Ownership, Assets, Industries, and Regions

The study also reveals fascinating differences across various segments of the Chinese economy.

State-owned enterprises (SOEs) appear to benefit from financialization up to the threshold, while non-SOEs experience a consistent negative impact. This may be attributed to stricter regulations on SOEs and the higher financing constraints faced by non-SOEs.

Long-term financial assets demonstrate the same threshold effect, highlighting the need for caution in managing these illiquid investments. Industry analysis reveals varying sensitivities to financialization, with manufacturing and information technology firms showing significant negative impacts beyond their respective thresholds. The agriculture, forestry, fishery, wholesale, and retail trade industries even experience negative effects at lower financialization levels.

Finally, regional disparities exist, with eastern region firms generally benefiting from moderate financialization, while firms in the central and western regions experience a negative impact. This suggests the influence of regional economic development and investment opportunities.

Charting a Prudent Course: Recommendations for Enterprises and Government

These findings offer valuable insights for both businesses and policymakers.

Companies must understand their own "sweet spot" for financialization. Staying below the 5.82% threshold allows for the "reservoir effect" to boost core operations, while exceeding it can lead to dangerous "crowding out." Differentiated strategies based on ownership, industry, and regional factors are crucial for success.

The government plays a vital role in fostering a healthy balance. Policies that support real investments, improve infrastructure, and promote innovation are essential. Targeted financial regulations can also help prevent excessive financialization and encourage companies to prioritize their core businesses.

By understanding the dynamics of financialization, Chinese companies and policymakers can work together to ensure sustainable economic growth and prosperity.