Using AHP To Improve The Credit Rating System For City Investment Bonds

With the development of China’s economy and society, China’s local governments are facing growing spending pressures. Due to the tax-sharing system, tax incomes received by the local government are limited and have been far beyond covering the expenses. Meanwhile, China’s Budget Law clearly provides that "Except as otherwise provided by law and by the State Council, local governments may not issue local government bonds." Therefore, the local government can only use local financing platform for debt financing.The so-called city financing platforms (also known as "Urban Development Investment Corporations", UDIC for short), are corporations engaged in urban infrastructure or public welfare and their controlling shares are usually held by the local SASACs or other government agencies. These corporations’start-up capitals are usually injected by local governments’transfer of land, equity and other assets. These corporations usually have unsound governance, poor profitability; their revenues mainly rely on local government subsidies and preferential policies. UDIC rely on debt financing, bonds issued by them are called city investment bonds. City investment bonds are a special class of bonds on China’s bond market. On the one hand, these bonds’issuers have defective business qualifications; on the other hand, these bonds have the local government’s "implicit guarantees".City financing platforms and city investment bonds issued by them indeed play a very important role in China’s economic growth and social development in recent years. However, because of the specificity of the bonds and the opacity of local governments, city investment bonds’credit risk is not thoroughly exposed in the market and the external rating agencies generally rate the city investment bonds higher than they should. In this context, the thesis hopes to establish a logical system to analyze the credit risk of the city investment bonds and use AHP to establish internal rating system of city investment bonds.Comparative analysis, case analysis, qualitative and quantitative analysis and other methods are used in this thesis. Firstly, city investment bonds’emergence and development in China are described in details. On this basis, characteristics of city investment bonds are summarized and the relationship between city investment bonds and local government bonds is explained. Then, the thesis introduces various bond credit risk assessment methods home and abroad, and by comparative analysis, the thesis concludes that analytic hierarchy process (referred to as "AHP") is the credit assessment method suitable for the development of China’s bond market. Then the thesis uses AHP to build the city investment bonds internal rating system, and applies this system to specific cases, which shows that the proposed method is feasible. Finally, the thesis proposed policy recommendations to reduce systemic risk of the city investment bonds:first, strengthen macro-control ability to keep the economy running smoothly; second, improve local government borrowing mechanism; third, introduce new credit enhancement method for city investment bonds; fourth, improve the transparency of the city investment bonds; fifth, transit city investment bonds to municipal bonds reasonably.