China’s No-bailout Reform: Impact on Bond Yields and Rating Standards

Posted: 1 Oct 2020 Last revised: 4 Aug 2021

See all articles by Guiqing Mo

Guiqing Mo

affiliation not provided to SSRN

Zhi Gao

Anhui University of Finance and Economics

Lei Zhou

Northern Illinois University - Department of Finance

Date Written: September 18, 2020

Abstract

Chinese government broke its long-standing practice of bond bailouts in March 2014. The number and par value of bond defaults increased substantially in the following years. We investigate the Chinese bond defaults from 2014 to 2019 and examine the impact of the no-bailout reform. We find significantly higher yield spreads on lower-rated bonds over AAA bonds after the policy change. Further, we document much lower default rates for SOE bonds than non-SOE bonds and an increased funding advantage of SOEs after March 2014. Surprisingly, credit rating agencies loosened rating standards in response to the policy change, suggesting their caving in to demand for higher ratings.

Keywords: Bond yield, Bond rating, Bond defaults, Chinese bonds

JEL Classification: G12

Suggested Citation

Mo, Guiqing and Gao, Zhi and Zhou, Lei, China’s No-bailout Reform: Impact on Bond Yields and Rating Standards (September 18, 2020). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3695042 or http://dx.doi.org/10.2139/ssrn.3695042

Guiqing Mo

affiliation not provided to SSRN

Zhi Gao (Contact Author)

Anhui University of Finance and Economics ( email )

Cao Shan Road No.962
Bengbu, Anhui 233030
China

Lei Zhou

Northern Illinois University - Department of Finance ( email )

Wirtz Hall
DeKalb, IL 60115
United States
815-753-1115 (Phone)
815-753-0504 (Fax)

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