Marketization vs market chase: Insights from implicit government guarantees
#MMPMIDC7320670
Zhang X
; Wang Z
?-/-? 2020[Sep]; 69
(?): 435-55
PMIDC7320670
show ga
Local Government Financing Vehicles (LGFVs) and state-owned enterprises (SOEs)
provide implicit guarantee during the issuing of bonds, thereby reducing their
funding cost. The credit spreads are lower when issued by a LGFV with a higher
administrative level. This means that implicit guarantee is also strengthened
with government centralization. We also explain the anomaly of municipal
corporate bonds (MCBs)? spreads decrease after a marketization regulation of
removing implicit guarantees. This paper provides strong evidence that the market
will chase implicit guarantee when default wave comes even under tight government
regulations.