Can Explicit Guarantee Reduce The Financing Cost Of Urban Construction Bond Efficiently

With the acceleration of urbanization in China,urban construction bond has become an important of financing tool for local governments.In 2016,substantive defaults broke out in Chinese bond market,urban construction bond market was greatly impacted.The credit risk of urban construction bond attracted great attention once again.Under the background of breaking the myth of "rigid payment" standardizing the issue of local government debt,credit enhancement is becoming more important for the issue of urban construction bonds.Taking the un-matured urban construction bond issued in 2010-2018 as the sample,this paper divides the guarantee into explicit guarantee and local government's implicit guarantee,and studies the effect of different explicit guarantee methods on the financing cost of urban construction bond,the impact of the substantive defaults in 2016 on the pricing logic of urban construction bond,and the change of the role of local government.Through empirical research,this paper finds that issuers in urban construction bond market adopt guarantees in case of moral hazard,rather than avoiding adverse selection.Therefore,lower-rated urban construction bonds issuers are more willing to take guarantees and get higher financing costs.After controlling subject rating and other factors affecting financing costs,this paper finds that explicit guarantees can significantly reduce the financing cost of urban construction bond.And also,third-party guarantee can reduce financing cost to a lower level compared with self-guarantee.This paper also finds that the substantive default in 2016 has significantly increased the importance of explicit guarantee in urban construction bond market.This emphasis is not only reflected in the identification of the "form" of guarantee,but also in the "substantial effect" of guarantee.After 2017,the effect of explicit guarantee on reducing financing costs has been significantly improved.The study also finds that although the government-backed guarantee companies are also professional third-party guarantee companies,their ability to reduce financing costs still lags behind that of the professional third-party guarantee companies,and the effect varies with regions.This means that although the government's implicit guarantee is withdrawing,the government can still establish guarantee companies,through which local government continues providing financial support and credit endorsement.The main suggestions of this paper are as follows: first,investors should pay more attention to explicit guarantee of urban construction bond formally and substantially and investment decision should no longer be based on government credit.Second,rating agencies should adjust the rating logic of urban construction bond,base rating results on enterprise financial analysis and project quality rather than government credit.Third,improve the guarantee ability of guarantee companies.Professional guarantee companies should continue to give full play to their advantages.Government background guarantee companies should rely on the support of the government to enhance the guarantee ability.Finally,broaden the financing channels of local governments,reduce its dependence on urban construction company and promote the substantive operation of urban investment company.