Price Discovery and Market Segmentation in China's Credit Market

33 Pages Posted: 24 Dec 2019

See all articles by Zhe Geng

Zhe Geng

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Jun Pan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); National Bureau of Economic Research (NBER); China Academy of Financial Research (CAFR)

Date Written: December 2019

Abstract

We study the extent of price discovery in the onshore Chinese corporate bond market, focusing in particular on the information content of credit spreads in China. Using Merton's model of default, we construct credit measures of publicly listed firms, using information from their financial statements and stock valuation. We find that, only after the first default in 2014, do credit spreads in China become informative. Compared with the findings in the US credit market, the magnitude of price discovery in the Chinese market is rather limited. We also find that the presence of outside government support for state-owned enterprises (SOEs) in China results in a market segmentation between SOE and non-SOE issuers that is harmful to price efficiency and market stability. Since 2018, the non-SOE issuers have suffered from explosive credit spreads, unprecedented defaults, and shrinking new issuance, while the SOE issuers have remained largely intact. Meanwhile, our default measures show that the non-SOE issuers are in fact stronger in credit quality than their SOE counterparts of the same rating category. Examining the impact of this segmentation on price discovery, we find that non-SOE credit spreads become significantly more informative since 2018, as concerns over credit become front and center for the non-SOE issuers. By contrast, as investors seek safety in SOE bonds, there is no improvement in the information content of SOE credit spreads.

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Suggested Citation

Geng, Zhe and Pan, Jun, Price Discovery and Market Segmentation in China's Credit Market (December 2019). NBER Working Paper No. w26575. Available at SSRN: https://ssrn.com/abstract=3508554

Zhe Geng (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Jun Pan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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