Implicit Government Guarantee and the Pricing of Chinese LGFV Debt
33 Pages Posted: 24 Feb 2017
Date Written: February 22, 2017
Lacking the authority to raise debt on their own, Chinese local governments set up financing vehicles for urban construction and investment to issue the so-called chengtou bonds. While these bonds are commonly understood to carry implicit government guarantee, the identity of the guarantor is rather unclear. By analyzing the yield spread on chengtou bonds, we find that investors began paying attention to city-level fiscal conditions after the well-publicized chengtou debt crisis of 2011. More recently, provincial fiscal conditions became important determinants of chengtou yield spreads as the provinces are allowed to issue municipal bonds to backstop the exploding LGFV debt.
Keywords: Chinese LGFV debt, chengtou bonds, implicit government guarantee, yield spread, city and provincial debt ratios
JEL Classification: G15, G18, H72, H74
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