Study On Credit Risk Assessment Of City Investment Bond In China

With the urbanization process in China, the task of local government in providing infrastructure and public services is getting heavier. In order to alleviate the pressures of insufficient funds and huge fiscal expenditure, the local government borrows through various channels, which the city investment bond is the major way. Twenty years since the birth of city investment bond,no one case of default occurs, even when some face solvency crisis, the local government will ultimately help to repay the principal and interest, so this reduces investors’ fears on systemic risk of city investment bond to some extent. However, with the fluctuations in regional economic development, financial strength and the economic cycle, some individuals may face temporary liquidity crisis, which may result in default under a certain condition.Based on the reference to a number of research results, this paper analysis the factors on credit risk of city investment bond based on the methods of theoretical modeling and empirical analysis. In the portion of Theoretical modeling, it analyzes the main factors on credit risk of city investment bond, such as local government, corporate financial condition, investor’s behaviors, bond credit promotion measures and support from local government. The second half of the paper test the results of the theoretical analysis, it use methods of factor analysis and multiple linear regression model to analyze the factors on credit risk and credit spreads.The result shows that the financial strength and administrative level of local government are the most important factors affecting credit spreads, as well as stability of fiscal revenue. It also shows the corporate financial condition and bond credit promotion measures are not significant factors. This reflects that investors have the same understanding that the local government is the ultimate payer of city investment bond.With the increasing size of city investment bond, it is still common to see issuing new bonds to retire old debt, so investors should raise alarm to debt accumulation risks. This paper recommends that investors need to build a credit risk evaluation model of city investment bond combined with risk preference, and avoid the bond issuers of relatively poor qualification.