Research On The "Credit Spread Puzzle" In China

In recent years,there have been frequent defaults in the bond market and rigid repayment expectations have been broken.However,the bond credit spreads have not increased with the increase of default rate.China's "credit spread puzzle" still needs to be further explained.Relevant studies show that default risk,liquidity risk,systemic risk premium,tax and enterprise micro characteristic are important explanatory factors of credit spread.However,literatures usually underemphasize the impact of monetary policy.As one of the most important economic policies,monetary policy has significant impact on the bond market.Especially in recent years,the peopled bank of China has created a variety of unconventional monetary policy tools in order to regulate economy and financial market more effective and accurate.Among those monetary policy tools,as the representative of lending facility policies,Medium-term Lending Facility is expected to guide the medium-term interest rate and promote the reduction of financing costs of enterprises.Then,whether Medium-term Lending Facility can regulate bond credit spreads or not?At the same time,the unconventional monetary policy tools require banks to pledge qualified collateral to central bank so that banks can obtain central bank money.As we know,some credit bonds are an important part of the qualified collateral.Then,whether central bank collateral framework have an impact on the credit spread of bonds which are included in the qualified collateral.Furthermore,the unconventional monetary policy pays more attention to manage expectations.However,with the increase of policy tools and objectives,it may be more difficult for market participants to form expectations about monetary policy.Then,how will the unexpected monetary policy affect the bond market?In order to answer the above questions,this paper examines the impact of monetary policy on credit spreads from different perspectives.From the perspective of the Medium-term Lending Facility,this paper empirically studies the influence of the interest rate of Medium-term Lending Facility on the credit spread and issuance spread of bonds,and discusses whether the interest rate of Medium-term Lending Facility can affect the credit spread and issuance spread of bonds through the money market interest rate.The empirical results show that:first,the interest rate of Medium-term Lending Facility have a significant impact on the credit spread and issuance spread of bonds.Second,the effect of Medium-term Lending Facility interest rate on different types of bonds is heterogeneous.It has a significant effect on the credit spread and issuing spread of state-owned bonds,but has little effect on private bonds At the same time,the Medium-term Lending Facility interest rate has more significant effect on the credit spread and issuance spread of low-rated bonds.Third,the Medium-term Lending Facility interest rate can affect credit spread and issuance spread of bonds through the money market interest rate,which proves the effectiveness of interest rate transmission mechanism of unconventional monetary policyFrom the perspective of the central bank collateral frameworks,this paper adopt the difference-in-differences model to analyze the influence of the central bank collateral frameworks oii credit spread and issuance spread of bonds included in qualified collateral.The empirical results show that:first,the central bank collateral frameworks significantly promote the reduction of credit spreads and issuance spreads of bonds included in qualified collateral.Second,the impact of the central bank collateral frameworks on the bonds of enterprises with different ownership is heterogeneous.It has a greater impact on private enterprises' bond,because of central bank's implicit guarantee effect on qualified collateral.Third,when the central bank implements loose monetary policy or when the proportion of qualified collateral in the bond market is high,the effect of the central bank collateral frameworks on the bond credit spread and the issuance spread will be weakenedFrom the perspective of unexpected monetary policy,combining international academia classic methods with domestic practical experiences,this paper studies the dynamic influence of monetary policy on the credit spreads of corporate bonds in China We propose to decompose the monetary policy into expected and unexpected components using the spreads of fixed and floating rate bonds,and furthermore,we analyze the dynamic and asymmetric effects of unexpected monetary policies on the credit spreads of corporate bonds.Our empirical results show that:firstly,the effect of unexpected monetary policy on the credit spreads is more significant than that of expected components;secondly,the effect of monetary policy on the credit spreads of corporate bonds is stronger in economic booms than that in economic recessions;last,the effect of monetary policy on the mid-term and long term corporate bonds is more significant,whereas the short term effect is not significantBased on the above conclusions,this paper has the followinLg policy implications.Firstly,from the perspective of the Medium-term Lending Facility,we should continue implementing unconventional monetary policy in order to regulate the economy and financial markets more effective and accurate.At the same time,implementing structural monetary policy tools such as targeted reserve reduction and Pledged Supplementary Lending(PSL)to cover the shortage of lending facility policies.Furthermore,we should improve the unconventional monetary policy framework and promote the transformation of monetary policy.Secondly,from the perspective of the central bank collateral frameworks,in order to support the important and weak areas in the economy,the central bank collateral frameworks can absorb relevant bonds or credit assets,so that the financing costs of these departments will reduce.The central bank collateral frameworks provides a new way to solve the problem of "difficult and expensive financing" of private enterprises.Furthermore,in the process of implementing the collateral management framework,monetary policy environment and bond market environment should be taken into account,so as to maximize the effectiveness of the central bank collateral frameworks.Thirdly,from the perspective of unexpected monetary policy,in order to achieve the objectives of monetary policy effectively,compared to the discretion rule,monetary policy should put more weights to guide and manage market expectations.Moreover,the central bank should establish adaptive policies for different economic cycles in order to promote the development of the bond market.Last but not the least important,the central bank should implement an combination of different types of monetary policies to encourage firms' long-term investments.