Study On Market-oriented Pricing For Chinese Local Government Bonds

Along with the completion of the revision of the Budget Law,a comprehensive promotion of self-issuance and self-repayment of local government bonds was conducted in our country since 2015.Local governments in each provinces,autonomous regions,municipalities and cities with independent planning can raise funds via local government bonds within the limits approved by the State Council,which represents that a standardize,institutionalize and regular mechanism of debt financing for local government bonds has been established.Following the guidance stipulated by State Council's that "local government bonds should be market-oriented",the goals and directions of the departments of finance in implementation of local government bonds is to establish a scientific and rational market-oriented mechanism for debt issuance and abolish the policies and institutions which restrain the market mechanism to function.However,based on the current issuing status,local government bonds is not fully market-oriented,there are still many problems to be solved.The issuance of local government bonds is under the interest-rate-bidding model and the interest rate of newly issued local government bonds comprehensively reflects the effect and impact of the issuance mechanism,therefore,the key issue of local government bonds market-oriented issuing is the pricing mechanism of local government bonds.This paper summarizes the relevant theories and research on the pricing mechanism of local government bonds at home and abroad,combs the sequence and progress regarding the academy research in this field,analyzes the current status of the issuance of local government bonds in our country,performs empirical studies on how market risk,credit risk of local government and characteristic of bonds would affect the credit spread of local government bonds based on the credit spread decomposition model,reveals the key factors and operating mechanism in determining the interest rate of local government bonds,investigates the issues and weaknesses in current mechanism,and proposes solutions and suggestions to perfect the market-oriented mechanism for issuance of local government bonds.Based on the study this paper concluded that:firstly,the issue rate of local government bonds are mainly affected by the macro market risk as compared with credit risk of local government and characteristic of bonds;secondly,the issue rate of local government bonds could not effectively reflect the credit risk of different local governments,which was resulted from the soft budget constraint to local government and rudimentary credit rating mechanism;thirdly,issuance of local government bonds faces with obvious policies and administrative interventions,including the issuance of new bonds to replace mature bonds with the aim to avoid the risk of debt maturity,the range in interest rates if the bonds issued by ways of underwriting or limited open tender is prohibited,and the deficiencies in the system of information publication and neglect identified in implementation of information publication policies.Based on above,with the aim to further improve the market-oriented pricing mechanism of local government bonds,build up a more rational and scientific mechanism to issue local government bonds,it is suggested that strengthen the hard budget constraint to local government,improve the mechanism for information publication and credit rating of local government bonds,optimize the issuance method of bonds,and gradually reduce the government's intervention in the issuance of local government bonds,so that the market-oriented operating mechanism is able to be embedded throughout the issuance of local government bonds.