Analysis Of Determinants On Yields Of Chinese Local Government Bonds

The Chinese local government bonds become a hot topic with investors’ risingconcern on the debt repayment capability of Chinese local governments at differentpolitical levels since2010. Most existing empirical research adopts qualitativemethods to depict the inherent risks of either municipal bonds or urban constructioninvestment bonds in China. It mainly results from the shortage of available database.This paper, however, collects raw data directly from the official websites of Chineselocal governments to make up for the blank in this regard, and employs themultivariate regression models to examine what factors affect the yields of theChinese local government bonds.For the municipal bonds, it is found that the municipal yield is not significantlyinfluenced by either the economic condition or the fiscal performance of thecorresponding municipality, which indicates that current municipals are quasi-treasurybonds. What investors care about is the liquidity of the municipal. Therefore, the issuesize of the municipal has exhibited its significant impact on the yield of the bond.For the urban construction investment bonds, although the leverage ratio showsits significant influence on the bond yield, the coefficient indicates that the higher theleverage, the lower the bond yield is, which contradicts with the economic theory. TheGDP p.c., fiscal revenue p.c. and the tier level of the corresponding municipality alsosignificantly impact the bond yield, which implies that investors pay attention to thecomprehensive strength of the local government. The credit rating of the bond alsoexerts significant influence on the bond yield. We further identify that key financialindicators of the bond issuer and corresponding local government are all taken intoaccount when credit rating companies rate the bond.In summary, we recommend improving the issuance form of municipals to betterreflect the different risks inherent with the municipalities. The credit rating companiesare also advised to better charge their responsibilities for investors’ sake.