China's Low Interest Rate Environment and Corporate Default Risk

Abstract Low interest rates are a prominent feature of China's current financial landscape. Using panel data on Chinese listed companies from 2016 to 2023 and a difference‐in‐differences model, this study showed that low interest rates can exacerbate corporate default risk, particularly among highly leveraged, highly financialized, and zombie firms. In such an environment, firms hold less cash and display higher levels of excessive debt and overinvestment, both of which can increase default risk significantly. The study further examined the role of macro‐prudential policies in mitigating risks arising from accommodative monetary policy and confirmed the effectiveness of regulation targeting the lending supply side. These findings provide empirical evidence of the adverse effects of China's low interest rate environment and offer insights into the development of enterprise risks and the implementation of preventive measures.