The Great Wall of Debt: Real Estate, Political Risk, and Chinese Local Government Credit Spreads

53 Pages Posted: 7 May 2015 Last revised: 31 Aug 2016

Andrew Ang

BlackRock, Inc

Jennie Bai

Georgetown University - Department of Finance

Hao Zhou

Tsinghua University - PBC School of Finance

Date Written: August 28, 2016

Abstract

Chengtou bonds -- urban construction and investment bonds, backed mostly by land sales, are the major source of financing for Chinese local governments. We find that one standard deviation increase in local real estate GDP -- as the main growth engine countrywide -- corresponds to about 8.6% decrease in Chengtou bond excess yields. Political risk, a novel measure based on the anti-corruption campaign in China, has a significant negative effect on Chengtou bond prices. However, conditional on high corruption level, real estate GDP actually elevates Chengtou bond yields; only low corruption provinces enjoy low financing costs with high real estate GDP.

Keywords: Chengtou bond, real estate, corruption, local government financing vehicle, government guarantee, systemic risk

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

Suggested Citation

Ang, Andrew and Bai, Jennie and Zhou, Hao, The Great Wall of Debt: Real Estate, Political Risk, and Chinese Local Government Credit Spreads (August 28, 2016). Georgetown McDonough School of Business Research Paper No. 2603022; Columbia Business School Research Paper No. 15-57; PBCSF-NIFR Research Paper No. 15-02. Available at SSRN: https://ssrn.com/abstract=2603022 or http://dx.doi.org/10.2139/ssrn.2603022

Andrew Ang

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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)

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