Solvency, Implicit Guarantee And Credit Spread Of China’s Corporate Bond

With the development of China’s corporate bond market, the abnormal problem of rigid payment is unfolding incrementally, which arouses public concern. Lenders always receive payment in time, regardless of debtor’s debt paying ability. Such state of bond market has seriously hindered the expansion and maturity of the market. In March 4th, 2014, the credit event of ―11 Chao Ri Bond‖ caused market shock and impact on the system of implicit guarantee and rigid payment. In the long run, implicit guarantee and rigid payment must be eliminated in the context of letting market play a decisive role of resource distribution.This article, basing on the reference and the current state of China’s corporate bond market, studies market response to the first case of insolvency in corporate bond market with the key point of government’s implicit guarantee. It analyzes the relationship among corporates’ debt paying ability, government invisible guarantee and bonds’ credit spreads in three different times.In the section of empirical analysis, it establishes multiple regression model to testify the influence that corporates’ solvency and local governments’ invisible guarantee have on credit spreads. Use local macro-economic indicators to represent governments’ willingness and ability to provide guarantee, including local GDP, GDP growth rate, loan-to-deposit ratio, fixed investment-to-loan ratio, public finance budget surplus(deficit)/ GDP. Use factor analysis to reduce multiple companies’ financial ratios into several common factors. Through multiple regression model, find how corporates’ solvency and governments’ invisible guarantee influence corporate bonds’ credit spreads, so as to assess market’s preparations for the elimination of rigid payment and make suggestions for investors and regulators.The empirical analysis shows that companies’ financial states have appreciable impact on bond’s credit spreads, which have reflected in prices of the bonds. Moreover, local governments’ invisible guarantee also has impact on credit spreads and prices. However, current prices have only revealed the difference of guarantee’s ability. The changing of governments’ willingness has not fully covered by the price. To sum up, we argue that China’s corporate bond market has made some preparations for the rule breaking of rigid payment. But those preparations are neither complete nor stable, and are fragile to sudden events.In the end of the article, we discuss this problem further and propose the future development strategy of China’s bond market and financial market as suggestion.