Credit Spreads Analysis Of Urban Construction Investment Bonds Based On Local Government Implicit Guarantee

Urban construction investment bonds as China’s only "quasi municipal bonds" liable for municipal project construction,has played an important role in the process of urbanization in our country,promoted the development of local economy.Under the background of four trillion stimulus plan in 2008,urban construction investment bonds ushered in the rapid development phase.However,because urban investment bonds actually belong to local government debt,the expansion of debt scale also brings huge local financial pressure,which lays hidden trouble for the default of urban investment bonds in the future.Therefore,in 2014,the new Budget Law stipulates that local governments are no longer responsible for urban investment bonds,have no obligation to pay urban investment bonds,and strictly prohibit the guarantee of urban investment bonds.Since then,urban investment bonds began to be separated from local government debt.However,practical examples show that the close connection between local governments and urban investment bonds has not been cut off.Due to the special attributes of urban investment projects,local governments still rescue urban investment bonds by revitalizing real estate projects,custody of state-owned enterprises,and using policy loans.The implicit guarantee of urban investment bond has always been a hot topic in scholars’ research and they have confirmed its existence.But they have different views on the role of implicit guarantee.Therefore,this study is still worth studying,has a certain practical and theoretical significance.Based on the ability and willingness of the implicit guarantee,this paper studies the impact on land transfer and real estate prosperity,and analyzes that when local governments have the implicit guarantee ability,the political risk of local governments will lead to changes in the willingness of implicit guarantee,which makes the effectiveness of implicit guarantee show different results.The political risks considered in this paper include the degree of local government corruption,the degree of marketization and the change of local government.Then selecting the data of 1,694 bonds issued from 2007 to 2017 as samples,and uses the fixed effect model to control the fixed effect of year and province.Referring to the practices of previous scholars,the credit spreads of urban investment bonds were taken as explained variables.In this paper,the degree of financial dependence on land,the degree of real estate prosperity,local fiscal revenue and three political risk factors are taken as the main explanatory variables.In addition to the implicit guarantee factors,the model also includes the control variables of the issuing subject factors and bond characteristics.Empirical results found that the higher the local government’s DEP,the smaller the credit spread of urban investment bonds,the stronger the implicit guarantee ability,which has a restraining effect on the credit spreads of urban investment bonds.However,high dependence on real estate investment lead to real estate bubbles due to excessive investment,and the market will think that local government’s future cash flow is facing high uncertainty,which increases their credit spreads.Corruption in local governments will lead to the lack of government functions and hinder regional economic development.Local governments carry out rent-seeking behavior by virtue of their "substantial issuer" status,which will increase the risk of urban investment companies.When the local government has a strong implicit guarantee ability,the degree of corruption increases their credit spreads,while the implicit guarantee cannot play a role in restraining the credit risk of urban investment bonds.When the debt paying ability is strong and the degree of local marketization is high,the credit spreads will be lower and the market’s credit expectation will be better.The change of local government will lead to political uncertainty and make it difficult for local governments to bail out urban investment bonds in crisis.Therefore,it will increase the credit spreads of urban investment bonds.Finally,this paper puts forward the following suggestions:the local government should strictly guard against real estate investment risk,pay close attention to price volatility and land assets value change,weaken the level of financial dependence on land,build structural health fiscal system and standardize the system of budget,actively carry out local government affairs public.In the process of economic development,local governments should gradually improve the degree of marketization and financing efficiency,reduce government intervention,make the pricing of urban investment bonds more market-oriented.At the same time,the central government should severely crack down on the duty crimes of local governments,gradually establish a sound performance appraisal mechanism for government officials,and perfect the legal system construction of urban investment bond market.Urban investment companies should actively seek ways to improve their business capabilities,reduce their dependence on government guarantees,and disclose financial information when issuing bonds to enhance investor confidence.