Study On Credit Risk And Credit Enhancement Of City Investment Bond In China

ABSTRACT:In accordance with the "Budget Law" and "Guarantee Law", the local government is prohibited to have a deficit and issue bonds. However, in order to ensure the smooth progress of municipal construction, the local government establishes Urban Construction Investment Company guaranteed by local governments to issue bonds, that is, the so-called "City Investment Bond". As the City Investment Bond focus on roads and bridges, public transportation and utilities quasi-public goods, so the profitability of Urban Construction Investment Company is weak, difficult to produce a net operating cash flow, and mainly lean on government subsidies to stay operational. Coupled with the imperfect rules, institutional flaws, and government debt risk, so that the City Investment Bond has a very serious credit risk.For lack of studies on City Investment Bond between domestic scholars and experts, especially in-depth study and technical aspects of the City Investment Bond.Therefore, this paper will study on Credit risk control countermeasures and put forward suggestions.Firstly, author systematically introduces the concept of the municipal bonds and City Investment Bond, summarizes the theory at home and abroad. Then discusses the sources of credit risk of bonds and common modern credit risk measurement model. Based on the characteristics and advantages of KMV model, this paper constructs the credit risk measurement models based on KMV model. As the local government's financial security flaw itself and cannot provide enough guarantees to the credit risk, so the paper introduces two common ways of increasing trust. Finally, author discusses precautions of the credit risk on City Investment Bond.