The Analysis of China Quasi-Municipal Bonds' Issuing Spread

Abstract

The development of China Quasi-Municipal bonds began in 1994 with China’s tax system reform which determines the current tax-sharing fiscal system of “primary finance, first-level authority”. Under this fiscal system, local governments often face the embarrassing situation that their responsibility is greater than financial power. Therefore, the local government has to solve the shortage of local construction funds by setting up a city investment company to issue city bonds. From the perspective of implicit guarantee of local government, this paper constructs the theoretical analysis framework of government implicit guarantee. Based on the cross-sectional data of China’s inter-bank Quasi-Municipal bonds in 2009-2017, through mixed regression, we can verify whether the implicit guarantee level of the government exists and its impact on bond issuing spread. In addition, the paper also introduced factors such as the underwriting reputation index and the financial indicators of the issuing entity, examining the reputation mechanism of the underwriter and the market positioning of the city investment company. Through empirical analysis, this paper has the following findings: First, the financial situation of local governments can significantly reduce the issuing spread of Quasi-Municipal bonds, indicating the existence of government implicit guarantees in the bond market. Second, the urban investment company’s factors often have no significant impact on the issuing spread, reflecting its market position is mainly the role of “financing tools” not a traditional enterprise. Third, outstanding underwriters can significantly reduce the issuing spread of Quasi-Municipal bond, which verifies the existence of reputation mechanism in the bond market.