Explicit Guarantee,Implicit Guarantee And The Credit Cost Of Municipal Corporate Bonds

The Chinese "Budget Law" stipulates that local governments are not allowed to issue bonds,but local governments are facing a gap in the demand for urban infrastructure construction funds,local governments need to generally set up urban construction investment companies as financing platforms to issue the municipal corporate bonds to raise urban construction funds.The default of the city investment bond will directly reduce the financing ability of the urban construction investment companies.However,the "Guarantee Law of the People's Republic of China " stipulates that the local government may not provide explicit guarantee for the municipal corporate bonds,but the guarantee can change the credit risk of the municipal corporate bonds.The credit cost enhances the ability of the producer to raise funds to better promote municipal construction.Therefore,local governments have the incentive to provide implicit guarantees for municipal corporate bonds.However,few theoretical studies have noticed this bond guarantee mechanism with Chinese characteristics and its impact on bond pricing.By studying the impact of explicit guarantees and implicit guarantees on the credit cost of municipal corporate bonds,on the one hand,it can supplement the theoretical research gap of credit risk pricing,on the other hand,it can provide reference for the rational pricing of urban investment bonds in practice.This paper uses the credit spread to measure the credit cost of urban investment bonds,selects 2221 municipal corporate bonds issued by the local government financing platform in China's inter-bank market in 2010-2018 as a research sample,and uses the Markov regional conversion model to describe the bond market status.The empirical results show that China's municipal corporate bond market has a period of relatively prosperous bond market status and a relatively weak period of bond market status.Relatively speaking,the prosperous state lasts longer;explicit guarantees have a considerable effect on reducing credit costs during the relatively prosperous period of bond market.However,in the relatively weak period of the bond market,the effect of reducing the credit cost of bonds is extremely small,and it is not economically significant.The implicit guarantee has a significant effect on the credit cost of municipal corporate bonds under the two state zone systems,and the effect is less dominant.The guarantee is more obvious;the use of the coupon rate of the corporate bond issued by the urban construction investment company as the explanatory variable to test the robustness of the model further proves the reliability of the above results.Finally,aiming at the development status of China's urban investment bond market and combining the empirical research conclusions,this paper puts forward the policy recommendations to promote the healthy development of China's municipal corporate bond market and reduce the credit cost of municipal corporate bonds.