Whether Locai Government’s Financial Support Is Efficient To Quasi-municipal Bond

Since2012, the number of quasi-municipal bond issued in China has grown explosively. The issued number increased from195in2011to484in2012with financing amount increased from248.55billion to649.93billion. The hot market of quasi-municipal bond has attracted the attention of scholars.This article analyses why the primary market of quasi-municipal bond grew explosively in2012. To cope with the international financial crisis, China has implemented a proactive fiscal policy and moderately loose monetary policy. The state has proposed a fiscal stimulus package of4trillion to invest heavily in infrastructure construction. In2009, China’s RMB loans increased9.59trillion Yuan, up by more than4.69trillion Yuan compared to2008. A large number of credit flows to Local Government-Backed Investment Units.To prevent the risks of Local Government-Backed Investment Units transmitted to the banking system, and even a threat to the stability of the national financial system, the central government has strictly controlled the credit of Local Government-Backed Investment Units in2010. Traditional bank credit financing channels blocked, but the funding needs of the local infrastructure still alive. Began in November2012, China’s Inter-Bank Market Dealers Association pause receiving request of sub-provincial UDIC for medium-term notes. This policy further squeezes sub-provincial UDIC to quasi-municipal bond market.In2012, the quasi-municipal bond market is hot, but the quasi-municipal bonds legal status is unclear. Compared with the U.S. municipal bond, it is similar but not exactly the same. The same point is that the raised funds are used in local infrastructure. The difference is that the repay responsibility of China’s quasi-municipal bond is unclear. Current policy linked issuance qualifications to local financial strength. If the local state’s debt ratio is more than100%, the issuance of quasi-municipal bond will not be accepted. But actually there is no legal defines the local state to assume responsibility for debt. The author proposes the need to clear the legal status of quasi-municipal bonds. With reference to the United States municipal bonds, China should divide quasi-municipal bonds into general obligation bonds and revenue bonds and clear the responsibility of the repayment of principal and interests.This paper refers the issuance rules of corporate bonds and sort out the financial integration solutions of quasi-municipal bonds. Local state often provides financial support to quasi-municipal bonds issuer such as injecting state-owned enterprises, land use rights and entering into repurchase agreements of government projects. This paper provides quantitative analysis of these means of financial support and finds that the increase of net assets and revenue can indeed reduce the bond issuer’s credit spread. High ratio of government subsidy income/revenue can also reduce credit spread. In other words, through these ways, Local Government-Backed Investment Units can reduce the interest rate of the bond issue.Through econometric model, we can conclude that local government financial support will reduce quasi-municipal bonds credit spreads. Too much financial support will bundle quasi-municipal bonds with local government finances, and finally cause local financial recessive burden.Finally, the author recommends the regulatory authorities to strictly control the financial risk of the local government and clear the legal status of quasi-municipal bonds. Third-party guarantees market and other security systems to prevent the risk of local government finances are also recommended.