Implicit Government Guarantee

  • 详情 Unveiling the Role of City Commercial Banks in Influencing Land Financialization: Evidence from China
    Local financial development is crucial for advancing regional financial supply side structural reform, enabling local governments to leverage financial instruments to effectively mobilize land resources and foster competitive growth. The introduction of numerous financial products linked to land-related rights and interests has resulted in a pronounced transmission and interconnection of fiscal and financial risks across regions. This study examines the impact of local financial development on land financialization in China using panel data from prefecture-level cities and detailed information on land mortgages. The findings indicate that the establishment of city commercial banks (CCBs) contributes to the progress of land financialization by incentivizing local government financing vehicles to participate in land mortgage financing, increasing the transfer of debt risks to the financial sector. Notably, the impact of CCBs on land financialization is more pronounced in regions with urban agglomeration, high GDP manipulation, inadequate local financial regulation, and robust implicit government guarantees. Further analysis reveals that CCB establishment has negative spillover effects on land financialization in neighboring areas, while expansion strategies such as establishing intercity branches, engaging in cross-regional mergers, and relaxing regulations have mitigated the rise of land financialization at the regional level. This study provides policy recommendations that focus on reducing local governments’ reliance on land financing and enhancing the prevention and management of financial risks.
  • 详情 Trade Credit and Implicit Government Guarantee: Evidence from Chinese State-Owned Enterprise Defaults
    This paper exploits China’s first default of state-owned enterprises to study the implicit government guarantee’s effect on SOEs’ trade credit financing. It finds that SOEs increase trade credit by 2.3% of total liabilities, on average, relative to non-SOEs after the first SOE default in China’s bond markets in 2015. The additional reliance on suppliers’ credit is more prominent among SOEs with higher information opacity. It is consistent with the literature where trade credit advantage lies in the suppliers’ superior information, as they can observe their clients through daily transactions. The current paper also finds that trade credits positively affect SOEs when IGG weakens. Overall, the results suggest that the reduction in IGG significantly affects Chinese firms’ financing decisions, highlighting the trade credit advantage against the backdrop of imperfect market institutions.
  • 详情 The Information Effect of Policy Announcement
    This paper examines the impact of a policy targeting firms with implicit government guarantees (IGGs). We focus on the debt management policy (DMP) proposed for state-owned enterprises in China. Our analysis shows that the DMP lowered the average yield of SOE bonds by 6.6 basis points. However, when accounting for the information effect of the policy announcement, the DMP’s impact ranged from 6.6 to 32.1 basis points. Our findings reveal that the information effect weakened the intended effect of the DMP and increased the average bond yields of both private-owned enterprises. We emphasize the need for policymakers to carefully design their policy communication to mitigate the information effect and consider the response of the financial market.
  • 详情 Local Political-Turnover-Induced Uncertainty and Bond Market Pricing
    Using political turnovers in mayoral appointments at the prefecture-city level in China, we show that investors in the municipal corporate bond market price their concerns for rising local political uncertainty into bonds and relocate capital toward other corporate bonds issued by local firms. Municipal/non-municipal corporate bond issue spreads increase (decrease) by 8.9 (14) basis points before the expected political turnover of mayors and reverse afterwards. The effect is more prominent for bonds issued in cities with investors who have a strong local preference, suggesting investors switch from MCBs to local non-MCBs in their bond holdings. The pricing effect is also stronger for bonds issued in regions with more developed financial markets and bonds with lower credit ratings. Lastly, bond market participants only price in the political risk induced by the turnovers of politician with direct involvement in local economic activities.
  • 详情 Credit Allocation under Economic Stimulus: Evidence from China
    We study credit allocation across  rms and its real e ects during China's economic stimulus plan of 2009-2010. We match con dential loan-level data from the 19 largest Chinese banks with  rm-level data on manufacturing  rms. We document that the stimulus-driven credit expansion disproportionately favored state-owned rms and  rms with lower average product of capital, reversing the process of capital reallocation towards private  rms that characterized China's high growth before 2008. We argue that implicit government guarantees for state-connected  rms become more prominent during recessions and can explain this reversal.
  • 详情 Government Guarantee, Informatio n Acquisition and Credit Rating Informativeness: Theory and Evidence from China
    We examine the influence of implicit government guarantees on the information content of credit ratings in China, guided by a theoretical credit rating game model in the presence of government guarantees. Using issuers’ controlling shareholder identity as the defining metric of implicit government guarantees, we document a less sensitive relationship between credit ratings and primary market offer yields for SOE bonds (i.e., bonds issued by firms controlled by government or government related agencies) than that for non SOE bonds. Moreover, ratings of non SOE bonds have a stronger predictive power on both future downgrades and a market based measure of issuer expected default probability than those of SOE bonds. These findings are robust to considering the u nobserved influence of the controlling shareholder identity on security pricing and bond default risk. Taken together, our empirical findings are consistent with the model’s prediction that government guarantees can dampen the incentives for credit rating agencies to acquire costly information, thus lowering the equilibrium informativeness of ratings for SOE bonds.