The Analysis Of Influence Factors Of The Quasi-municipal Bond Spread

Quasi-municipal bond is issued by UCIC(Urban Construction Investment Company) established by local government, it is a special type of bond existing in the period of our economic transition. Quasi-municipal bond is issued mainly as corporate bond in inter-bank bond market. It has both the characteristics of corporate bond and municipal bond. The rapid development of quasi-municipal bond and UCIC lies in the background of2008international financial crisis. The government promulgated proactive fiscal policy and moderately loose monetary policy, and initiated the Four Trillion Stimulation. There were only1.18trillion come from the central government budget, the local government required to fund the other2.82trillion. However, the local government has seriously imbalanced financial situation since1994tax reform.In order to help the local government successfully implement the Four Trillion Stimulation, the China Banking Regulatory Commission and people’s Bank of China publicly supported local governments to establish financing company and issue corporate bonds, medium-term notes and other financing instruments. Since then UCIC and quasi-municipal bonds experienced an explosive growth.In2009UCIC has issued nearly three hundred billion quasi-municipal bonds, and after the setbacks of2010and2011, the quasi-municipal bond issuance was over one trillion. It has financed over4trillion for local governments within a few years. Not only has it helped the economy to overcome the crisis, but also it is an important way to raise fund for urbanization. Also as a major type of bond, quasi-municipal bond has played an important role in promoting our bond market.Despite its rapid growth, we still found some problems and risks of quasi-municipal bond. Firstly, quasi-municipal bond is not a formal instrument in bond market, it is actually the debt of local governments but not allowed to be issued by local governments. Quasi-municipal bond is issued by UCIC, however UCIC is not an independent legal entity and could be easily influenced by local governments. Therefore the establishment and financing decisions of UCIC are not standardized. Secondly, the rapid growth of Quasi-municipal bond causes debt risk for the local governments. From the aspect of debt scale, the proportion of debt balance as the percentage of local fiscal revenue rises from23%in2010to41%in2012; From the aspect of regional distribution, the debt ratio of central and western areas is higher, especially in Qinghai and Gansu. From the aspect of administrative level, the scale of quasi-municipal bond issued by country is rising rapidly, while the economic growth and financial strength is weak. In order to control the risk of debt, local governments should establish a comprehensive debt management system and determine the reasonable size of the debt, also they need to build a risk warning system.This article focused on the credit spread of quasi-municipal bond, and analyzed the influence of macro-economic factors, local economy and local financial situation, credit enhancement to credit spread. In regression analysis, we built a multiple regression model and found that the credit spread has positive correlation with inflation rates, risk free interest and term spread, and has negative correlation with money supply.In the analysis of local economy, we calculated the credit spread of quasi-municipal bond issued by Jiangzhe district and Hunan&Anhui district, and found that the credit spread of Jiangzhe district is lower than Hunan&Anhui district. Since the economic development of Jiangzhe district is better than Hunan&Anhui district, we drew the conclusion that credit spread could be lower if the economy is better. In the analysis of local government fiscal situation, we calculated the credit spread of quasi-municipal bond issued by provincial, municipal and country UCIC and found that provincial UCIC has the lowest credit spread while the country UCIC has the highest credit spread. We drew the conclusion that credit spread could be lower if the local government fiscal situation is better. In the analysis of credit enhancement, we introduced three types of credit enhancement, a third-party guarantee, pledge guarantees and collateral. We found that credit enhancement could significantly improve credit rating of quasi-municipal bond.