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Implicit Government Guarantee and the Pricing of Chinese LGFV Debt

33 Pages Posted: 24 Feb 2017  

Laura Xiaolei Liu

Guanghua School of Management, Peking University

Yuanzhen Lyu

Hong Kong University of Science & Technology (HKUST)

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: February 22, 2017

Abstract

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

Suggested Citation

Liu, Laura Xiaolei and Lyu, Yuanzhen and Yu, Fan, Implicit Government Guarantee and the Pricing of Chinese LGFV Debt (February 22, 2017). Claremont McKenna College Robert Day School of Economics and Finance Research Paper No. 2922946. Available at SSRN: https://ssrn.com/abstract=2922946 or http://dx.doi.org/10.2139/ssrn.2922946

Laura Xiaolei Liu

Guanghua School of Management, Peking University ( email )

Peking University
Beijing, Beijing 100871
China

HOME PAGE: http://www.pku.edu.lauraliu.cn/en-home.html

Yuanzhen Lyu

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Fan Yu (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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