Research On The Impact Of Government Implicit Guarantee On The Liquidity Of Municipal Bond

Urban investment bond is a special kind of bond between enterprise bonds and local government bonds under the background of the old budget law,guarantee law,the reform of tax sharing system and the policy guidance of promoting economic development through infrastructure.Although the form of urban investment bonds belongs to corporate bonds,according to the purpose of raising bond funds,they are more similar to local government bonds,and play a major policy role in promoting infrastructure and stabilizing the economy.In the development of China’s urban investment bonds,we can see the obvious mark of economic development with Chinese characteristics.Its issuer is the local financing platforms(LGFPs),which often has close ties with the local government.Given this tight relationship,market investors tend to believe that local governments provide implicit guarantees for urban investment bonds.However,unlike explicit guarantees,implicit government guarantees are not provided by contract or law,and the rescue willingness of local governments is often difficult to judge.The market expectation of the implicit guarantee for urban investment bonds is unstable.When facing the impact of risk events or major regulatory policy changes,the implicit guarantee expectation is prone to drastic changes,so as to greatly improve the risk expectation of the market and trigger a large-scale selling of urban investment bonds,which may become an important source of liquidity risk in the bond market.To stop the "contagion" of financial risks among different financial institutions,the central regulatory policies appear frequently,aiming to draw the boundary between urban investment debt and government credit,and break the rigid payment of urban investment bonds.For example,the No.43 document issued by the Central Government in October 2014 aims to isolate the rigid payment of urban investment bonds.From the end of October to early November 2016,The State Council and the Ministry of Finance successively issued documents No.88 and 152,again emphasizing the clear division of the boundary between the debt and government credit of urban investment bonds.However,the relationship between local governments and local government financing platforms is closely related,and it is difficult for the responsibility bond between the two to be cut quickly off.Under the background of the policy of "breaking the rigid payment",it is still doubtful whether the government’s implicit guarantee will affect the liquidity of urban investment bonds and to what extent affect the liquidity of urban investment bonds.In addition,under the policy environment and policy guidance of "breaking the rigid payment",there is a possibility that the implicit government guarantee expectation will plummet due to the policy adjustment,and the liquidity risk is further highlighted.This paper aims to examine whether implicit guarantee expectations still exist in the context of the "breaking the rigid payment" policy,and to further study the impact of the expected strength of implicit guarantee on bond liquidity to provide a reference for regulating the liquidity risks that may arise in the reform process as much as possible.We collect the 2019-2021 corporate bond panel data.Using a variety of statistical methods,we compare the liquidity differences between BLGFPs with implicit guarantees and general enterprises with no implicit guarantee to investigate whether there are liquidity differences.Further,this paper estimates the size of the expected strength of implicit guarantees to study its impact on liquidity.Specifically,to create a quasi-experimental environment through the propensity score matching method,this paper analyzes the liquidity difference between BLGFPs and general corporate bonds.We find that,on the whole,the liquidity of state-backed corporate bonds that may still have implicit guarantee expectations is still significantly stronger than the general corporate bonds.Then,this paper further estimates the expected strength of implicit guarantee based on the characteristics of bonds,and uses the concept of "expected spread-actual spread" to investigate the expected strength of implicit guarantee.First of all,the sample bond characteristics of private corporate bonds are used to estimate the determination function of the actual spread of bonds,and then the BLGFPs sample data is inserted into the estimate function to get the spread estimate.Finally,we subtract the actual spreads by our estimates to obtain the estimates of the implicit guarantee strength.This method makes the implicit guarantee expectation of the measurement cover the fluctuation of government financial situation,the fluctuation of government guarantee,the change of government guarantee willingness,and the fundamental impact of the company.The sample is limited to stateowned background corporate bonds,and the impact of the expected guarantee strength on liquidity is tested through the panel data fixed effect and random effect model.The results show that the expected guarantee strength would have no significant impact on liquidity between the bonds.Combined together,the results of this paper show that under the background of "breaking the rigid payment" policy,there are still implicit guarantee expectations for enterprises with state capital background,but there is no liquidity difference between the corporate bonds with state capital background,which shows that the policy has achieved its initial aims.In addition,the implicit guarantee expectation remains,on the one hand,the "breaking the rigid payment" has not reached the final policy purpose,the reform needs to continue;on the other hand,the preference of the market entities for urban investment bonds with implicit guarantee expectation is therefore confirmed in this paper,the research results can provide a reference for the control liquidity risk alongside the "breaking the rigid payment" policy.