Summary:
Since 2020, China has experienced a number of bond defaults. Notably, Henan Yongmei Group, an AAA-rated bond issuer, unexpectedly declared a default of one-billion-yuan super and short-term commercial paper, triggering discussions on disorderly defaults and “debt evasion.” In this context, it is essential to understand the impact of bond defaults to mitigate bond default risks and foster the healthy growth of the Chinese bond market. Theoretically, a bond default can have two effects on other local bonds. First, the information effect is driven by shared economic fundamentals or implicit guarantees from local governments. A bond default reveals additional information about fundamentals or implicit guarantees, thereby impacting bonds in the same region. Second, the flight effect arises from investors' fund reallocation from high-risk assets to low-risk assets, especially to local low-risk assets when local segmentation exists in the bond market, to reduce their risk exposure. To investigate these effects in the Chinese bond market, this paper categorizes credit bond defaults in China between 2014 and 2020 into state-owned enterprise (SOE) bonds and private enterprise bonds. We empirically analyze the impacts of these bond defaults on local issuers' bond spreads in the secondary market and their bond issuance in the primary market. The results support the presence of both the information and flight effects. First, we find that SOE defaults adversely affect local SOE bonds and private enterprise defaults adversely affect local private enterprise bonds. In both cases, this leads to an increase in yield spreads and a decrease in subsequent issuances by the corresponding type of issuers within the same province. This finding is consistent with the prediction of the information effect. Second, we observe that private enterprise defaults positively affect yield spreads and the subsequent issuance of local SOE bonds. This finding aligns with the flight effect. Third, we identify disorderly defaults, which deviate from market expectations, and quantify their information effect. Compared with orderly defaults by SOEs, disorderly defaults by SOEs exert a more substantial adverse impact on local SOE bonds. Although orderly defaults by private enterprises exert a positive impact on local SOE bonds, their disorderly defaults have a negative impact on local SOE bonds. This finding indicates that disorderly defaults can amplify the adverse information effect, which dominates the positive flight effect in magnitude. Based on the aforementioned findings, we make three policy recommendations. First, the presence of the flight effect indicates that the Chinese bond market still encounters local segmentation. We believe that such local segmentation stems from the current dominance of banks' participation and local governments' inclination to channel local financial resources within their regions, leading to local banks displaying a preference for local corporate bonds. To address this, the construction of a unified national market is imperative to facilitate the complete circulation of bond funds across the country. This will require a reduction in the control of local governments over financial institutions and an increase in the participation of institutional investors in the bond market to change the bank-dominated situation. Second, the flight effect reflects that investors still perceive SOE bonds to be safer than private enterprise bonds, indicating the existence of implicit guarantees enjoyed by SOEs. To prevent the flight effect from aggravating financing structural imbalances between SOEs and private enterprises, it is crucial to effectively address the soft budget constraint faced by SOEs, allowing both private enterprises and SOEs to compete fairly for financing opportunities. Lastly, disorderly defaults exacerbate the adverse impact of bond defaults. For bond issuers, engaging in “debt evasion” behaviors, such as not providing risk warnings and preemptively transferring assets, can cause increased debt costs and future challenges with bond issuance. Furthermore, ignoring market principles will ultimately lead to market penalties. Therefore, it is imperative to enhance the timely tracking and information disclosure of bond default risks. This paper makes three main contributions. First, considering both the information and flight effects, we demonstrate the presence of a regional flight effect in the Chinese bond market. This reveals that local segmentation still exists in the Chinese bond market. Furthermore, banks, as primary investors, prefer to localize resources, restricting the complete flow of funds across the country. Second, we distinguish the heterogeneous impact of bond defaults between SOEs and private enterprises. Third, we distinguish between expected and unexpected defaults, revealing that unexpected defaults have more severe negative impacts.
刘晓蕾, 刘俏, 李劢, 朱妮. 债券违约的区域性影响 ——信息效应与逃离效应分析[J]. 金融研究, 2023, 518(8): 74-93.
LIU Xiaolei (Laura), LIU Qiao, LI Mai, ZHU Ni. Regional Impacts of Bond Defaults: Analysis of the Information Effect and the Flight Effect. Journal of Financial Research, 2023, 518(8): 74-93.
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