Local guarantees and SOE bond pricing in China

47 Pages Posted: 8 Jun 2021 Last revised: 18 Nov 2022

See all articles by Yabin Wang

Yabin Wang

Norwegian University of Science and Technology

Sharon Xiaohui Wu

Hong Kong Monetary Authority

Date Written: March 22, 2022

Abstract

We study the changing landscape of credit market guarantees by examining the risk-pricing of the Chinese state-owned enterprise (SOE) bonds, which have experienced rising defaults across provinces from a zero record. Using primary market bond issuance data, we identify a province premium that captures the perceived local government support for the SOEs. We find that on average the perceived local government support is on the decline, while the subnational debt market has become more segmented since 2018. This evidence is found to be closely related to the divergence in local government’s fiscal space and the occurrence of SOE default incidents in the area, highlighting the adverse linkage between public debt and corporate financing costs.

Keywords: Segmentation, Bond Market, Local Public Debt, Government Guarantee, Default, China

JEL Classification: G12, H6, H7, F15

Suggested Citation

Wang, Yabin and Wu, Sharon Xiaohui, Local guarantees and SOE bond pricing in China (March 22, 2022). Available at SSRN: https://ssrn.com/abstract=3861726 or http://dx.doi.org/10.2139/ssrn.3861726

Yabin Wang (Contact Author)

Norwegian University of Science and Technology ( email )

Klæbuveien 72
Trondheim, 7030
Norway

Sharon Xiaohui Wu

Hong Kong Monetary Authority ( email )

55th Floor Two International Finance Centre
8 Finance Street
Hong Kong
Hong Kong

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