Local Government Bond Information Spillover and the Relevance of Credit Rating: Evidence Based on the “Self-Issuance and Self-Payment” Reform of Local Government Debt
LIAN Lishuai, DENG Yingwen, LI Jianqiang
School of Economics and Management, East China Normal University; School of Accounting, Zhejiang Gongshang Univeristy
Summary:
Before 2009, due to restrictions from the Budget Law of the People's Republic of China and other regulations, local governments were not permitted to raise funds directly. Instead, they had to rely on local government financing vehicles (LGFVs) or state-owned enterprises as financing agents, often pledging land assets or future fiscal revenues as collateral to obtain loans from banks or issue urban investment bonds (chengtou bonds). Starting from 2009, China resumed the issuance of local government bonds, piloting models of the “agency-issuance and agency-repayment” and “self-issuance and agency-repayment”. However, development competition among local governments and implicit guarantees gave rise to soft budget constraints, leading to continuous growth in local government debt, especially hidden debt, thereby escalating potential debt risks. In response to the continuous increase in local government debt and its negative effects, China began to comprehensively implement reforms in the management system of local government debt in 2015. Following the approach of “opening the front door and blocking the back door”, a policy of “self-issuance and self-repayment” (SISR hereafter) for local governments was promoted. By allowing local governments to issue government bonds within approved limits, the growth of hidden local debt was curbed, and the structure of local debt was optimized. Under the SISR, local governments are required to enhance the management and quality of bond information disclosure, and reinforce market constraints and social supervision. Meanwhile, the issuance and trading of a large number of local government bonds have promoted the formation of a relatively large and active local government bond market. This paper focuses on the incremental information brought about by the SISR reform, exploring whether such information spills over into the corporate credit bond market, particularly influencing the effectiveness of credit ratings, aiming to reveal the economic consequences of local government bond reform from a novel perspective. The reform has led to increased transparency regarding local governments' fiscal health, policy orientation, and economic fundamentals. In addition, the prices in the active local government bond market more accurately reflect the credit risk of local governments and their debts. Given the close relationship between firms' development and local government conditions, this information provides valuable input for investors and other market participants in assessing the credit risk of corporate bonds issued in that region. On the one hand, credit rating agencies (CRAs) can leverage local bond information to improve their assessment accuracy; on the other hand, the availability of such information increases market and regulatory scrutiny over potential rating biases, intensifying reputational and compliance pressure on CRAs, and driving them to improve the quality and effectiveness of their ratings. Therefore, this paper takes credit bonds as the research object, uses the policy shock of the SISR reform of local government bonds carried out by various local governments in China, and examines its impact on the effectiveness of credit bond ratings. The findings reveal that the SISR reform improves the effectiveness of credit bond ratings. The tests of the mechanism show that this effect is more pronounced in bonds issued by local state-owned enterprises and LGFVs, as well as in regions with higher trading volumes of local government bonds, verifying the existence of an information spillover effect; In addition, the primary channel through which the reform improves rating effectiveness is by enhancing rating quality. Heterogeneity tests show that the positive relationship between SISR reform and the effectiveness of credit ratings mainly exists when the financial transparency of local governments is relatively low. Lastly, the study finds that credit ratings of local government bonds themselves can generate spillover effects onto corporate credit ratings. The theoretical and policy contributions of this paper are as follows. First, it enriches the literature on the economic consequences of local government debt governance by approaching it from the perspective of corporate credit ratings. Second, it offers rare empirical evidence based on China's bond market, using a policy reform as an exogenous shock to identify the spillover effects of local bond information disclosure on the credit bond market. Third, the findings provide valuable policy insights from the perspective of market information, contributing to the enhancement of market discipline, cross-market regulatory coordination, and the improvement of credit rating quality and effectiveness in China's bond market.
连立帅, 邓英雯, 李建强. 地方债信息溢出与信用债评级有效性——基于地方债“自发自还”改革的经验证据[J]. 金融研究, 2025, 537(3): 169-187.
LIAN Lishuai, DENG Yingwen, LI Jianqiang. Local Government Bond Information Spillover and the Relevance of Credit Rating: Evidence Based on the “Self-Issuance and Self-Payment” Reform of Local Government Debt. Journal of Financial Research, 2025, 537(3): 169-187.
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