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
Date Written: August 28, 2016
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
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