The 2018 new asset management regulation and LGFV bonds in China

Zhigang Qiu, Xi Sun, Lijun Wu, Dun Jia and Ziyue Wang

Economic and Political Studies, 2023, vol. 11, issue 4, 469-493

Abstract: While the local government debts and local government financing vehicle (LGFV) bonds underwent reconstruction, in 2018 the new asset management regulation introduced some tighter measures to restrain shadow banking business and to mitigate the moral hazard issue that led to an ongoing boom of the LGFV market. This paper examines the impacts of the 2018 new asset management regulation on the credit spread of newly issued LGFV bonds and explores how the new asset management regulation affects the implicit guarantee of local governments in the LGFV market that has piled up systemic risks. We find that the release of the new asset management regulation has raised the credit spread of LGFV bonds at issuance. More importantly, the credit spread becomes increasingly sensitive to the local governments’ financial capacity and credibility right after the introduction of the new asset management regulation. Therefore, investors are compensated by more risk premiums for holding LGFV bonds issued by the local governments with a weaker balance sheet. Consequently, the implicit guarantee problem in the LGFV bond market has worsened.

Date: 2023
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/20954816.2022.2055814 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:repsxx:v:11:y:2023:i:4:p:469-493

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/reps20

DOI: 10.1080/20954816.2022.2055814

Access Statistics for this article

Economic and Political Studies is currently edited by Qing He and Cunna Li

More articles in Economic and Political Studies from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().