The Funding Cost of Chinese Local Government Debt

48 Pages Posted: 7 May 2015 Last revised: 19 Jul 2018

Jennie Bai

Georgetown University - Department of Finance

Hao Zhou

Tsinghua University - PBC School of Finance

Date Written: July 18, 2018

Abstract

Chengtou bond is the soli asset with market prices that can capture the funding cost of Chinese local government debt. In contrast to the U.S. municipal bonds, Chengtou bonds are issued by private corporations but implicitly guaranteed by the local hence central governments, which are reflected by novel risk characteristics---real estate GDP and political risk. One standard deviation increase in local real estate GDP (political risk) corresponds to 10 (9) basis points decrease (increase) in bond yields, respectively. However, conditional on political risk, real estate GDP actually increases bond yields, suggesting that only local governments with low political risk can enjoy the low funding costs driven by high real estate growth.

Keywords: Chinese local government debt, real estate, political risk, government guarantee

JEL Classification: D73, G12, G14, G28, H74

Suggested Citation

Bai, Jennie and Zhou, Hao, The Funding Cost of Chinese Local Government Debt (July 18, 2018). Georgetown McDonough School of Business Research Paper No. 2603022; PBCSF-NIFR Research Paper No. 15-02. Available at SSRN: https://ssrn.com/abstract=2603022 or http://dx.doi.org/10.2139/ssrn.2603022

Jennie Bai (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC 20057
United States

HOME PAGE: http://www.jenniebai.com

Hao Zhou

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China
86-10-62790655 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
1,095
rank
16,922
Abstract Views
4,099
PlumX