Are the Urban Construction Investment Bonds’ Guarantees Credible? Evidence from Credit Ratings and Bond Pricings
ZHONG Huiyong, ZHONG Ninghua, ZHU Xiaoneng
School of Finance, Shanghai University of International Business and Economics; School of Economics and Management,Tongji University; School of Finance, Shanghai University of Finance and Economics
Abstract:
Based on the samples of Urban Construction Investment Bonds(UCIBs) issued by Local Government Financing Platforms(LGFPs), this paper studies the responses of credit rating agencies and institutional investors to double guarantees(“nominal guarantee” of the bonds and “implicit guarantee” of the local governments) of UCIBs. It comes out that both guaranteed bonds and an increase in government revenue improve the bonds’ rating grades while have no significant effect on the reduction of credit spreads. These results are from the “issuer pays” business model where debt default cannot be truly addressed by credit rating agencies as there are collusions between credit rating agencies and bond issuers, leaving the institutional investors to rely on their own credit rating system to correct this. Hence, it comes a rise of trust crisis in the credit rating system in China’s bond market, and blocks the further development of China’s bond market.
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