| After the global financial crisis in 2008,China announced a four trillion stimulus package,promoting the real economy recovered and ushered a "V"-shaped reversal.After the short-term fiscal stimulus,China’s economic growth rate continued to decline.In recent years,it entered a "New Normal" and "L-shaped" stage.However,during the "L-shaped" stage,China’s financial sector entered an era of great development and prosperity.In 2010,the total size of China’s asset management was only 13 trillion,but in less than ten years,it has grown to nearly a hundred trillion.In 2007,the added value of China’s financial sector accounted for only 4% of GDP.10 years later,this figure expanded to 7.8%.Behind the prosperity and expansion of the financial sector,different types of financial products with promised returns known as rigid redemption existed,the phenomenon of hiding bad assets in the capital pool appeared,the passageway business was rampant.The asset management that was originally used to manage wealth on behalf of clients has degenerated into the shadow of banks,becoming a tool for concealing asset investment,circumventing the constraints of regulatory indicators,and regulatory arbitrage.As the economy stabilized and recovered in 2017,the pressure to steady growth was reduced,and the policy level started to prevent financial risks.Supervision had curbed the disorderly expansion of the financial sector through different measures such as inter-bank leverage clearance,penetration of underlying assets,and the net value of wealth management products.Those actions were taken to prevent asset pricing bubble and physical debt risks.However,during the process of implementation,there was inevitably a tendency of overstepping and rigidly uniform which allowed for no flexibility.Although in the long run,it will help to prevent the overall financial risk,in the short run,it was necessary to be alert to the risk of "disposal risk".With the expansion of the inter-bank business and asset management scale,the risk preference of the financial institutions had continued to go up during the gradual increase in the cost of debt.Regulatory arbitrage and idling arbitrage objectively existed,but the rapid expansion of the financial sector had also broken the interest rate controls,under which small and micro businesses were unable to obtain funds,thus providing more financing channels.From this perspective,the financial innovations in the past cannot be useless.Compared with the bank financing obtained by small and micro businesses,the process of increasing risk preference of financial institutions also forced them to allocate funds to less efficient soft-budget constraints and financing entities with rigid payment characteristics,such as state-owned enterprises with overcapacity,county-level financing platforms,and real estate.Therefore,the inter-bank expansion and the asset management industry scale by leaps and bounds,had,to some extent,made up of insufficient on-balance sheet credit of traditional bank.It not only filled up the funding gap required by micro,small and medium enterprises,but also satisfied the support of on-balance sheet credit due to regulatory restrictions of the inability to support the financing platforms,businesses under overcapacity,and real estate.However,without restrictions,it may cause systematic financial risks over time.This article is based on the interbank business governance in 2007 and the strict financial regulatory measures provided in 2018 as experimental scenarios.Combined with the Chinese institutional background and regulatory mechanism,we not only examined the blocking of the monetary policy transmission mechanism arising from the interbank business governance,but also investigated how the new asset management regulations and a strict financial supervision have resulted in the phenomenon of credit stratification,we use district and county-level urban investment,which has benefited from the expansion of inter-bank and asset management and observe that how the financing entities did,especially the low-rated and long-term parts,have been impacted by credit stratification after the introduction of new asset management regulations.First,this article constructs the money supply model of the central bank and commercial banks from the perspective of balance sheet adjustment and conducts a partial equilibrium analysis based on the actual situation,exploring the micromechanism behind macro-liquidity fluctuations deeply.At the same time,combined with China’s current financial development,a layered model of currency,liquidity,and credit was proposed.Based on this model,the internal mechanism of the impact of liquidity fluctuations on the real economy and financial markets was deeply studied.In particular,creatively proposed that when the real economy suffers from liquidity fluctuations,it will present an impact process from heavier to lighter according to the transmission path of "peripheral-middle-core” and summarizes the conduction mechanism of liquidity stratification.The study indicated that after adopting strong financial supervision,the peripheral layer of the financial system(mainly shadow banking)will be firstly affected,which will form a significant liquidity stratification effect.With the evolution of the liquidity stratification effect,the financing entities(mainly individuals,small and medium-sized enterprises,developers,industries with overcapacity,and urban investment issuers with low and medium ratings)corresponding to the outer layer will have greater liquidity pressure,so that partial credit stratification and credit risks appeared.The original intention of the strong financial supervision policy was to prevent financial risks and reduce entity leverage.However,when facing the exogenous financial regulatory shocks,the high volatility of shadow banks in the short term will not only fail to prevent financial risks and reduce entity leverage but also,very likely,amplify financial risks and increase entity leverage as large-scale financial institutions adopt "one size fits all" behaviors toward the liquidity of the shadow banks and small and medium-sized financial institutions,in response to the demands of strict supervision.Secondly,this paper found that the original inter-bank expansion chain was severely impacted after the tightening of financial supervision.The strict inter-bank supervision policy has blocked the transmission of monetary policy among financial institutions and led to the phenomenon of intensified liquidity stratification.Although the central bank has stepped up its open market operations and adopted RRR cuts to quell the impact of financial supervision,liquidity seems to be only silting up in large financial institutions.The financing difficulties of small financial institutions and nonbanks have not improved,although the central bank amplified market operations.Specifically,when financial institutions encounter the impact of strict financial supervision,the credit scale of the interbank fund merging party decreases,and the credit scale of the interbank fund lending party rises.For the profit of commercial banks,strict regulatory policies will lead to interbank funding receiving less profit on average for both the financing parties and accommodating parties.Finally,with the intensification of liquidity stratification,the market risk preference has dropped significantly,which is manifested by a sharp increase in the credit premium of investors to the financing entities,and,in turn,shows obvious credit stratification at real economy level.As district and issuers of county-level urban investment are highly dependent on off-balance sheet liquidity and the financing needs of shadow banks,this article starts with the new regulatory documents(asset management regulations)issued in 2018.The article focuses on analyzing the impact of the new asset management regulations on the risk premium of district and countylevel urban investment bonds in the process of restructuring the regulatory system.Our research found that the new asset management regulations have promoted the redesign of asset management products and the adjustment of the allocation of asset management sub-sectors in the bond market,non-standard assets,etc.,hampering the issuance of district and county-level urban investment bonds,therefore increased risk premium and shorten the duration.The introduction of new asset management regulations deteriorated the refinancing process on urban investment at district and county levels.The impact of the increased risk premium of district and county-level urban investment bonds on urban investment bonds will not be limited to itself,because the market may be under risk control considerations and adopt a “one size fits all” approach to other bond investments.Those areas with similar fundamentals such as fiscal revenues and land transfer revenues as the default entities will inevitably be affected.Once more risk exposure events occur,the liquidity of the urban investment bond market may disappear.As default risks spread,more urban investment bond issuances have shrunk due to the sharp decline in market risk preference,which is obviously detrimental to local government debt risk prevention.The innovations of this article are mainly reflected in the following aspects: First,previous researches provide us with ideas and theoretical support for studying China’s current practical problems.The difference between this article and the mentioned existing research is that firstly this article is a targeted research based on current practical problems.The current volatility of China’s financial market is rare in history.On the one hand,it is the inevitable and endogenous phenomenon of years of financial market reform.On the other hand,there are also some exogenous and structural shock factors.These existing documents have not been systematically studied;Secondly,we have constructed a three-layer model of "base currency-broad currency-shadow currency" by studying the balance sheet operations of central banks and commercial banks and deeply analyzing the internal mechanism of the money supply and its mode conversion.Thirdly,we have noticed the unique liquidity and layered structure in China,where different levels of liquidity have different elasticities,thus a distinct liquidity shock model of “core-middle-periphery" is constructed.Second,in terms of the transmission mechanism of strict financial supervision on monetary policy,it makes up for the deficiency of relevant researches on the transmission mechanism of central bank’s monetary policy under the background of inter-bank supervision.many scholars have focused on the impact of capital supervision and liquidity supervision policies under the current macroprudential system.There are also many scholars who explored the relationship between macro-prudential policy and monetary policy under the framework of DSGE.Domestic scholars have paid their attention to the impact of the development of interbank business on the total money supply,the ability of banks to create liquidity,and the stability of the financial system.It can be seen that the relevant studies of domestic and foreign scholars have not taken into account how the central bank can establish a more efficient monetary policy transmission mechanism under the inter-bank supervision system,which also provides space for the extension of this paper.Third,in terms of the impact of liquidity stratification on local government debt,the current academic research on urban investment bonds mainly focuses on a series of issues such as the risk of local government debt.Previous studies mainly investigate the entire urban investment bond market and only few literatures focus on the county economy,which is an important foundation of China’s economic vitality,or study its debt problems including urban investment bonds.In addition,relatively few empirical studies examined the impact of financial regulatory policies on urban investment bonds.This article found that,as the new regulations and policies was announced,despite that the decline in market risk preference and the rise in liquidity preferences led to a sharp increase in the credit spreads of district and county-level urban investment.In addition,this paper also found that credit spreads of district-and county-level urban investment bonds in areas with high fiscal income have increased significantly after the regulations were officially promulgated,indicating that the new regulations have objectively led to a “one-size-fits-all” effect on the bonds.The main contribution of this part is to enrich the research on local government debt at the district and county level,and to supplement the research on the policy impact of the new asset management regulations. |
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