Study On Credit Risk Of City Investment Bond In China

In recent years, China’s economic have achieved high-speed development, in order to maintain the good momentum, in order to promote the sustainable and stable development of the local economy, local government investment scale has expanded each year, especially after the outbreak of the global financial crisis. In recent years, China’s local fiscal revenue maintained rapid growth, but still not enough to support the needs of the local government funds, local government fiscal gap expand step by step, in2009, the local government’s fiscal gap close to3trillion yuan. China’s "Budget Law" and "Guarantee Law" clearly provides that local governments shall not issue bonds and shall provide security for any debt. Face the enormous fiscal gap, in order to ensure the smooth progress of the local construction, the local government established local government investment and financing platform, the platform company financed by bank loan and bonds, the local government provided guarantee for the debt of the platform company. City Investment Company is mainly engaged in the construction of municipal infrastructure, which got weak earnings and mainly rely on financial subsidies to stay afloat, so the city investment bond faced high credit risk. Based on this, this article study the main source of credit risk of the city investment bonds and measured the probability of default through the empirical analysis.This paper first defined the concept of the city investment bonds. City investment bonds are financing instruments issued by local government financing platform to finance, the paper first introduced the concept of local government financing platform. Based on this, the paper pointed out the concept of the city investment bond. Then the article described the three stages of development of the city investment bond, including the initial stage, the stage of rapid development and high-speed development stage. Then this paper introduced the overview of city investment bonds of China.Next, this paper analyzed the source of the credit risk of the city investment bond from three aspects, they are local financial risk, institutional risk, and the city investment bond for their own risks. Because local finance provided guarantee for the city investment bond, almost all of the city investment bond relied on local financial subsidies, and local financial risk was the primary source of the credit risk of the city investment bond. Secondly, due to the late starting of China’s bond market, the existence of inadequate laws and regulations were inevitable, such as credit rating system is imperfect, information disclosure system is not perfect, which to some extent, increased the credit risk of the city investment bond. In addition, this paper detailed the credit risk of the city investment bond from the point of the city investment bond.Subsequently, this article introduced the commonly used credit risk measure model, and described the VaR model in detail which used in this article. VaR is the expected maximum loss over a given region within the target range within a certain confidence interval occurred. This article described the three basic methods for computing VaR, parameter method (variance-covariance method), historical simulation and Monte Carlo simulation, respectively. In this paper, we assumed that the local fiscal revenue was used to guarantee city investment bonds, we stand on the point of view of the city investment bond investors, each year city investment bond needed to pay the principal and total interest, and the difference between the local governments fiscal revenue and city investment bonds was the loss of the investor. In this paper, we set confidence level referring to the historical average default rate of U.S. municipal bonds, and this paper used Monte Carlo simulation method and the VaR model to measure the credit risk of the city investment bond.Then, there is the empirical analysis section of this article. We selected Jiangsu Province and the city of Chongqing to study. Firstly, we calculated the scale of the city investment bonds through the statistics; Secondly, this article used the Geometric Brownian motion model and Monte Carlo Simulation to simulate local fiscal revenue in2012; Finally, under the confidence level of99.5%, this paper calculated the VaR. The empirical results indicated that, under the confidence level of99.5%, there is no credit risk to the investors The probability in Jiangsu Province is0.052%, while in Chongqing, it is0.161%, which suggest that the city investment bond had lower credit risk in China. Finally, there is the summary of this article. This paper argues that, although at this stage, city investment bond had lower credit risk, but with the continuous improvement of China’s bond market, city investment bonds will be constantly improving, but at the same time, with the continuous improvement of China’s economic, the local fiscal revenue growth will be slower than before. If the local government revenue was still be the sole source of repayment for the city investment bond, the credit risk of the city investment bond will undoubtedly continue to grow. Therefore, in order to induce the credit risk of the city investment bond, this article put forward countermeasures and suggestions from three aspects.The contribution of this paper was:firstly, there was few paper study on the city investment bonds, study on credit risk of city investment bonds through empirical analysis was even less; secondly, secondly, the study on credit risk of local government debt always used the KMV model, while this paper used the VaR model to measure the credit risk of the city investment bond; finally, this article did not assume that the scale of the city investment bonds was certain percentage of local revenue.