Flight to Quality and Implicit Guarantee: Evidence from Chinese Trust Products

42 Pages Posted: 1 Feb 2017 Last revised: 2 Apr 2021

See all articles by Heungju Park

Heungju Park

Sungkyunkwan University - SKK Business School

Sungbin Sohn

Peking University - HSBC Business School

Date Written: January 12, 2021

Abstract

We investigate the existence of alleged implicit guarantee in the primary market of Chinese trust products by testing whether flight-to-quality occurs towards trust products during financial turbulence. Since flight-to- quality occurs only towards safe assets, investors’ weak preference for trust products during turmoil implies the absence of guarantee. By jointly analyzing trust product issues and yield spreads, we test whether trust products are preferred particularly during financial turbulence. We find that market turmoil measured by larger credit spread overall induces more issues of trust products with greater yield spreads. Among more creditworthy products, however, we find more issues with smaller spreads when credit spread increases, indicating strong preference for these products. Such high preference during turmoil is observed only in the earlier sample period. The findings suggest that unlike media allegation, implicit guarantee only narrowly exists for selected trust products and is steadily weakening.

Keywords: Chinese shadow banking, Flight to quality, Credit spread, Implicit guarantee, Collective fund trust product

JEL Classification: G15, G23, O16, O17

Suggested Citation

Park, Heungju and Sohn, Sungbin, Flight to Quality and Implicit Guarantee: Evidence from Chinese Trust Products (January 12, 2021). Available at SSRN: https://ssrn.com/abstract=2909775 or http://dx.doi.org/10.2139/ssrn.2909775

Heungju Park

Sungkyunkwan University - SKK Business School ( email )

Seoul
Korea, Republic of (South Korea)

Sungbin Sohn (Contact Author)

Peking University - HSBC Business School ( email )

University Town
Nanshan District
Shenzhen, Guang Dong 518055
China
+86-755-26035324 (Phone)
+86-755-26035344 (Fax)

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