Government subsidies and municipal bond pricing: Unveiling the impact of explicit guarantees in China
Xiao Cao, Xiaomin Gong, Runsheng Gu, Yuhang Li, Xinyuan Liu
Keywords:
Municipal Corporate Bonds, Government Subsidy, Credit Spread, Market Competitiveness, Government Implicit Guarantee
Abstract:
The Chinese municipal corporate bond market is currently facing growing risk accumulation, underscoring the need for a critical review of its pricing mechanisms and competitiveness. Using daily data from 2019 to 2023, we obtained 6,693 samples and employed a regression model to analyze the influence of explicit government guarantees, as reflected by government subsidy indicators, on the pricing of municipal corporate bonds. These findings indicate that investors interpret such subsidies as indicators of operational risk for municipal companies, resulting in widened credit spreads for these bonds and affecting their market competitiveness. This study further categorizes the effects of these explicit guarantees across varying levels of regional economic development and administrative hierarchy, revealing notable heterogeneity in their impact on bond pricing. This finding suggests that the economic landscape and administrative status of regions play crucial roles in shaping the influence of government subsidies on bond pricing and, by extension, the competitiveness of these bonds in the market. Additionally, this paper uses a double interaction term to explore the interplay between explicit and implicit government guarantees through the lens of the “Yongmei” incident. We discovered that the diminished market anticipation of implicit government backing significantly amplifies the effect of explicit government guarantees on the pricing of municipal corporate bonds, further impacting their competitiveness. To reduce risks within the municipal corporate bond market and foster the stable functioning of municipal entities, governments should minimize their interference in the market, thereby allowing market forces to operate more efficiently.
Fulltext download:
 Government subsidies and municipal bond pricing: Unveiling the impact of explicit guarantees in China [PDF file] [Filesize: 1.13 MB]
 10.7441/joc.2025.03.03
Cao, X., Gong, X., Gu, R., Li, Y., & Liu, X. (2025). Government subsidies and municipal bond pricing: Unveiling the impact of explicit guarantees in China. Journal of Competitiveness, 17(3), 63-99. https://doi.org/10.7441/joc.2025.03.03
|
