Given the global net-zero target for carbon emissions and awareness of the role of investment and finance in a low-carbon economic transition, financial regulators in many countries have started to promote green investment by developing so-called green financial policy to alleviate the barriers to and increase the incentives for green investment. For example, central banks provide refinancing for banks that conduct green lending. Discussion and development of green financial policy have increased in recent years as climate change and environmental degradation have intensified. In 2016,China promulgated the Guidelines for Establishing the Green Financial System, in which several green financial policy tools were first proposed. Financial regulators worldwide have started to take action, particularly since the founding of the Network of Central Banks and Supervisors for Greening the Financial System in 2017.
The growth of green financial policy is expected to continue; however, many questions remain about the theoretical relationship between green financial policy and the low-carbon transition of the physical economy, which is the ultimate purpose of this policy. Do financial factors affect the low-carbon transition? If so, how? What can financial policy do for the transition?Compared with other policies, what are the advantages and disadvantages of green financial policy? Moreover, given the current COVID-19 pandemic, what can green financial policy do for the “green recovery” that is being called for by many? This study aims to answer these questions.
We build a macroeconomic growth model of directed technical change. In this model, the production sector is divided into two parts—clean and non-clean—to analyze the transition of industrial structure and its environmental impact. We introduce financial constraints and financing costs to analyze the role of financial policy. The model is also extended with the shock of the COVID-19 pandemic to analyze the green recovery.
Using the model, we first show the specific roles of financial policy in supporting the low-carbon transition by giving and proving four formal propositions. This clarifies the mechanisms through which financial factors can play a role in the low-carbon transition. Second, we numerically analyze the effect of green financial policy and compare it with the effects of other green economic policies. This reveals the advantages and disadvantages of green financial policy and can help policymakers choose appropriate policies. Third, we simulate the dynamics of the economy under different policy scenarios with and without the COVID-19 shock. This shows what the pandemic and different policy mixes could bring to the green transition and economic recovery.
This study finds that (1) stronger financial constraints in the clean sector relative to the non-clean sector delay the low-carbon economic transition and cause environmental degradation, and green financial policy can alleviate these financial constraints. (2) Green financial policy can increase the output of the clean sector and, under certain conditions, facilitate the low-carbon transition of the economy and prevent environmental degradation. (3) Financial policy is cost-effective compared with some fiscal policies that promote the low-carbon transition; there is space for mixing policies. (4) Increasing the intensity of green financial policy in the aftermath of the pandemic would be beneficial for achieving a green recovery and may accelerate the low-carbon economic transition at a cost lower than expected.
Our work has significance for both research and policy. In terms of research, this study discusses the role of financial policy in the low-carbon transition from the economic growth perspective using a theoretical model. It extends the horizon of financial development theory from the sustainability perspective and provides a theoretical basis for future empirical research on the effects of green financial policy. Our growth model, which includes factors related to green finance, could also be a useful tool for future research. In terms of policy, this paper provides a theoretical basis for analysing green financial policy and provides policymakers with the following practical information: the mechanisms by which green financial policy works, the advantages and disadvantages of such policy,the way to effectively mix different policies and policy recommendations for the post-pandemic era.

Green development is a must for human progress, and the role of finance in green development is receiving more attention. “Green finance” generally refers to financial products, markets and policies related to environmental protection and sustainable development. In academia, the concept of green finance is closely related to environmental and climate finance and overlaps sustainable finance and socially responsible investing (SRI). In the past two decades, the development of global green finance has significantly advanced, and green finance issues have received increasing attention. However, theoretical research in this field lags behind. Although the number and proportion of studies have grown rapidly,and the economic theory of green finance is weak. Scholars struggle to rigorously answer the fundamental question of why we need green finance. According to the general principles of economics, the externality of pollution indicates that the main force of environmental protection should be the public sector rather than the financial system. However, more and more countries are choosing green finance. What is the economic intuition behind this phenomenon? An in-depth discussion of these issues forms the basis for effective policymaking and the development of green finance theory.
This study uses data on listed companies worldwide to estimate the debt ratio of green enterprises in various countries as a proxy indicator of green finance. Then, combining that with fiscal expenditure data from the United Nations, we examine the changes in global green finance and government expenditures on environmental protection. The results show that in the past 20 years, total global government expenditures on environmental protection have slightly increased, but the ratio of this expenditure to GDP has a downward trend. Meanwhile, the scale and ratio of green finance to GDP have continued to increase, and the development level of green finance has been in line with the economy. Further cross-country panel data analysis shows that green finance effectively promotes long-term economic growth, showing obvious heterogeneity with green fiscal investment. On the basis of these findings, we ask whether green finance differs from traditional public finance in terms of economic principles?
This study builds a multisector general equilibrium growth model that includes residents, enterprises, financial sector and government. It depicts the dynamic relationship between green fiscal investment, green finance and economic growth and reproduces the abovementioned facts. The theoretical analysis shows that, firstly, green finance has advantages for long-term growth. It can mitigate the deficiency of public services subject to congestion and achieve high-quality economic development. Secondly, there is a scale threshold above which firms voluntarily choose to protect the environment by using green finance without government intervention. Subsidies for green credit can promote firms' green investment and enable the economy to reach a higher steady state. Thirdly, a combination of green financial and fiscal policies to guide fiscal investment in the initial stage of economic development and gradually strengthen the promotion of green finance in later stages can speed economic growth, achieve a higher steady-state capital stock level, and meet the goal of high-quality economic development. This study answers the question of why we need green finance from the economic theory perspective. It addresses the basic theoretical shortcomings in the field of green finance, providing basic theoretical support for the development of green finance and a useful analytical framework for further theoretical research on green finance.
This article also has implications for future research. For instance, the next important academic question to address is how green finance affects financial institutions. Although this article discusses the macroeconomic benefits of green finance, it does not explore whether financial institutions have inherent incentives to engage in green finance. There is some empirical evidence in the literature, but the theoretical basis of this problem is still unclear. Whether the implementation of green finance policies can be incentive compatible is an important direction for future research.

China has experienced frequent environmental disasters with huge negative impacts on economic and social development. The real economy and financial sector are becoming more closely aligned, and the impact of environmental disasters on the real economy will inevitably be transmitted to the financial system and institutions, affecting financial stability, generating financial risks, and generally amplifying the negative impact of environmental disasters. From the perspective of physical risk, this paper discusses the actual impact of environmental disasters on banks' default risk through dynamic stochastic general equilibrium model simulations and empirical tests using data from China's banking institutions from 2008 to 2018.
This article's main contributions are as follows: First, it is one of the first theoretical and empirical studies on China's environmental risks. Second, in terms of research methods, this article simultaneously introduces disaster shock factors and the financial friction mechanism, highlighting the amplification effect of the financial accelerator mechanism on the impact of disaster shocks. Further, this article examines the impact of disaster shocks on relevant economic and financial indicators, including bank default rates. In terms of empirical research, this article uses the entropy method to construct environmental disaster loss indicators on multiple dimensions, providing empirical evidence from China of environmental risks. Third, the theoretical and empirical tests not only support the existence of environmental risks but also further analyze and explore a series of derivative consequences of environmental disasters on banks' default rates, including the impact on corporate financing constraints and banks' willingness to lend. This enriches the research perspectives on topics such as financing constraints and bank liquidity creation.
The simulation results of the theoretical model show that environmental disasters significantly increase the default rate of bank credit contracts. This leads to higher risk premiums and reduces the scale of credit issuance, undermining enterprises and increasing their financing costs. Eventually, the tightening of financing constraints significantly negatively affects investment and output, reducing enterprises' leverage. Consistent with these results, the empirical tests show that environmental disasters significantly increase banks' default rates, and these findings pass a series of robustness tests. The mechanism test shows that the decline in total factor productivity, asset impairment loss and the increase in macroeconomic uncertainty are all significant transmission channels in this process. Further analysis shows that the environmental disaster effect of increasing the default rate significantly reduces the risk appetite of banks, reducing the scale of lending and risk-taking. This then restricts enterprises through tighter financing constraints and higher financing premiums, negatively affecting their operations.
The main conclusions of this paper have the following policy implications: First, the systems and mechanisms to deal with environmental disasters should be improved and more attention given to the negative impacts of environmental disasters on the financial system. Next, awareness should be strengthened, and financial factors fully incorporated into the system. Second, government departments should consider the stability of the financial system when formulating disaster relief policies. Specifically, they should explore establishing disaster financial stability funds to prevent financial system runs and liquidity crises caused by extreme events. The supervision of financial institutions should include a standing disaster reserve, improving the construction of disaster recovery centers, adopting relevant incentives to guide financial institutions to reduce investment and credit for brown stranded assets, and encouraging financial institutions to engage in green finance. Third, the financial sector must fully consider climate and environmental risks and conduct environmental stress tests on a regular basis. Before launching a credit business, banks and other financial departments should thoroughly assess the climate and environmental risks of the business and region and fully consider environmental disaster risks in credit pricing. After a disaster occurs, the financial sector should also actively assist disaster-stricken enterprises through extensions and other benign interactions.

At the Boao Forum for Asia 2021 Annual Conference, Yi Gang stated that “we should accelerate research on the introduction of climate change factors in stress tests of financial institutions and incorporate climate factors into the investment risk management framework. At the same time, we will step up support for carbon emission reduction by leveraging commercial bank ratings, deposit insurance rates, and a macro-prudential assessment framework. … the central bank will focus on macro-prudential policies to deal with the potential systemic risks brought by climate change with monetary policies to support green development … and further strengthening the coordination between macro-prudential policies and monetary policies will be the key work in the process of achieving the 30/60 carbon target.” Therefore, research on the economic impact of carbon trading and carbon tax policies is of great significance. Additionally, the impact of climate policy and the roles of financial friction and the dual-pillar policy in the economic transformation process must be thoroughly discussed. Realizing China's 30/60 goals, constructing and perfecting the two-pillar framework to deal with climate transition risks, maintaining financial stability and achieving a smooth economic transformation and upgrade are of great theoretical and practical value.
This study makes three main contributions to the literature. First, it evaluates the macroeconomic effects of carbon pricing from both short-and long-term perspectives. It also explores the exogenous macroeconomic shocks of carbon price fluctuations within upper and lower limits. Second, we effectively distinguish between the financial accelerator effects of asset price volatility and risk aversion. Third, we combine the two-pillar and climate policies to evaluate the effectiveness of the two-pillar policy using certainty simulation and welfare analysis. This approach is an effective way to improve the two-pillar framework approach to dealing with the risks of economic transformation.
Dynamic stochastic general equilibrium modeling shows that, first, two kinds of carbon pricing can contribute to high-quality long-term economic development in China, despite some short-term negative effects. Floating carbon prices intensify economic fluctuations, but a lower limit on the market price helps alleviate these fluctuations. Second, financial friction magnifies the negative economic impact of climate policies. Under dual financial friction, the financial accelerator effect caused by the financial sector avoiding default risk is as important as the financial accelerator effect caused by the financial friction between the financial sector and residents. Third, in response to the economic effects of climate policy, monetary authorities should not overly focus on short-term inflation; rather, they should focus on output and demand. With a structural imbalance of supply and demand, expanding green investment, promoting green production and guiding consumer demand are the best ways to resolve inflation. Moreover, under the two-pillar regulation, macroprudential policies can effectively mitigate the negative economic impact of climate policies, enhance financial stability and improve residents' welfare.
The following policy recommendations are offered: First, combining fixed and floating carbon pricing will help achieve the 30/60 carbon target. A fixed carbon price can effectively cope with carbon technology changes, reducing their economic impact. Second, risk aversion in the financial sector will significantly exacerbate the negative impact of climate policies. Therefore, the government should encourage the financial sector to share in the risks and provide financial services to the real economy. However, attention should be paid to risk concentration in the financial sector. Third, macro-prudential policy should be used to address the financial instability and economic fluctuations that result from climate policy. Monetary policy should address structural supply-demand imbalances. For short-term structural supply-demand imbalances that lead to inflation, monetary authorities should promote production, expand green investment, promote supply-demand balance and address inflation at the root.

In recent years, China has introduced successive green finance policies, intensifying policy support for the green transition of the economy. The effectiveness of these policies and how they promote the green transition of the economy has attracted a great deal of attention.
In this paper, we integrate the green finance policy and green transition into the sustainable investment asset pricing model and analyze the effects of green finance policy on the expected returns of risky assets and firms' green innovation. Next, using the quasi-natural experiment of the central bank including green bonds as qualified collateral, we provide empirical evidence of the effects of green finance policy from the perspectives of financing costs and corporate green innovation. We also conduct various robustness tests, such as changing the sample interval, a placebo test, policy delay effect, and propensity score matching to address potential endogeneity in our empirical investigation.
This study's main findings are as follows. (1) The central collateral framework policy reduces the credit spreads of green bonds and increases the credit spreads of brown bonds, demonstrating that the green finance policy creates financing incentives for green firms and pressures for the green transition of brown firms, respectively. (2) These effects are stronger in the green finance reform and innovation pilot zone but gradually weaken over time. (3) The central collateral framework policy significantly enhances the green innovation of brown firms through financial pressure that forces them to engase in green transition.
According to these findings, we propose three policy implications for the central bank to better promote the green transition of the economy. (1) The central bank should continue to provide financial support for green firms through the expansion of collateral. Specifically, expanding the green assets those qualify as collateral or increasing the mortgage rate of green assets can further strengthen the policy effects. (2) The central bank should implement the continuous and progressive green finance policy and further expand the green finance reform and innovation pilot zone to promote green transition. (3) The central bank should provide financing incentives for brown firms that actively engage in green innovation.
This paper makes the following contributions to the literature. (1) With the introduction of green finance policy and firm's green transition decision, we extend the sustainable investment (ESG) asset pricing model of Pástor et al. (2021). ESG asset pricing models rarely consider the impact of financial policy, especially green finance policy, on asset prices. Using the extended ESG asset pricing model, this paper provides a unified theoretical framework for green finance policy, firms' financing costs and firms' green transition. (2) To address potential concerns about model uncertainty caused by a single empirical methodology, we use a combination of difference-in-difference (DID), triple differences (DDD) and continuous DID methods to identify the causality between green finance policy, bond credit spreads and firms' green transitions, resolving the endogeneity problem. (3) This paper provides evidences of the green effects of green finance policy from the perspectives of credit spreads and firms' green innovation. We comprehensively test the heterogeneous effects of the policy on bond credit spreads and the dynamic time-varying and regional differences in the policy effects. We verify the mechanisms that force brown firms to engase in green transition.

The potential economic and financial risks of climate change have become a hot topic in academia. The Global Risks Report(2020) states that the top five global risks in the next 10 years are environmental and that the financial risk associated with climate change is an important source of systemic financial risks. Avoiding these risks requires comprehensive investigation of the financial risks related to climate change. Although climate change has a systematic impact on the financial system, many financial institutions are not paying enough attention to the financial risks induced by climate change.
Agricultural production is the first sector affected by climate change because the input-output efficiency of agricultural production is strongly correlated with climatic conditions. As rural financial institutions handle the finance needs of the agricultural sector and climate change increases the uncertainty of agricultural output, the potential climate risk is transmitted to rural financial institutions. This paper proposes the following transmission mechanism based on the climate change, agricultural development and climate finance literature: climate change → uncertainty in agricultural production → agricultural credit risks. This paper further proposes an empirical research scheme using the market location and primary business of rural financial institutions.
In the empirical study, we exploit a panel of financial data from 2010 to 2019 that includes 249 rural commercial banks and 7 rural banks from 26 provinces, 128 prefecture cities and 251 counties. Using the average annual temperature of each county, we construct an index to quantify the degree of climate change. The average annual temperature over the past 50 years is used as a reference to standardize the average annual temperature. After standardization, the average annual temperature illustrates the fluctuations in temperature and enables comparisons of the degree of climate change between counties. The empirical study has two levels. We first investigate the influence of temperature fluctuations on credit risk using a fixed effects model. Next, we use a nonparametric model and grouped regression to analyze the heterogeneous effect of temperature fluctuations on credit risk.
The results lead to the following conclusions. (1) Temperature fluctuations of the county where a rural financial institution is located significantly affects its credit risk. Using the average annual temperature over the past 50 years as a reference line, when the average annual temperature is 1 standard deviation above the reference line, the proportion of nonperforming loans increases by 0.1365%. Hence, climate change significantly increases the credit risk of rural financial institutions. (2) If the average annual temperature fluctuation is subdivided into four quarters, only the temperature fluctuation in winter significantly affects credit risk. Taking the average winter temperature over the past 50 years as a reference standard, when the average winter temperature is 1 standard deviation above the reference standard, the proportion of nonperforming loans increases by 0.0777%. (3) The effect of temperature fluctuation on credit risk level has phased characteristics. As the range of the average annual temperature fluctuation expands, the sensitivity of credit risk to climate change increases from weak to strong. (4) Although city commercial banks, rural commercial banks and rural banks all serve local economic development, climate change does not significantly affect the credit risk of city commercial banks because their business is more dispersed among regions and industries. In a robustness test, we measure climate change using the normalized difference vegetation index (1 km) and use a multi-way fixed effects model, and the results remain unchanged.
Through empirical examination, this paper detects the direction and degree of the effect of climate change on agricultural credit risks. The findings provide not only empirical evidence for qualitative research but also implications for rural financial institutions and regulators to respond to climate change. The following countermeasures are suggested based on the research conclusions: carrying out stress testing, implementing differentiated supervision and innovating risk mitigation tools to prevent agricultural credit risks.

China officially launched its green credit policy in 2007. Green credit requires financial institutions to consider enterprises' environmental responsibility in their credit decisions. China's green credit policy has developed rapidly since its implementation. However, some enterprises obtain capital support by addressing environmental protection in name only, threatening the healthy development of China's green financial system and creating an unfavorable factor in China's environmental protection marketization mechanism. Therefore, this paper focuses on the “more words than deeds” phenomenon in enterprises' environmental protection practices and investigates its influence on banks' credit decisions. The results will help credit institutions to recognize the implementation risks of green credit policy. This paper provides a new decision-making reference for ensuring the healthy development of green credit.
Using text analysis to collect environmental performance data from the reports of listed companies, this paper identifies the characteristics of more words than deeds enterprises and empirically tests the effect of the more words than deeds approach on bank credit. The findings are as follows. (1) The more words than deeds approach helps enterprises obtain more bank loans. (2) Compared with long-term bank loans, the positive effect is more obvious for short-term bank loans. (3) The promulgation of the Guiding Opinions has restrained the positive influence of the more words than deeds approach on bank loans. (4) Further analysis shows that compared with enterprises that do not use the more words than deeds approach, the environmental responsibility performance of enterprises with more words than deeds has a significant positive impact on the credit resources of banks. This positive impact is more obvious in enterprises with no political connections, lower value and a worse market environment.
The potential contributions of this paper are as follows. (1) Under the current green credit policy, this paper deepens understanding of corporate environmental behavior decision-making and practices. (2) This paper enriches research on the factors that influence bank credit decisions and on corporate information manipulation. In addition, this paper provides new support for improving the environmental information disclosure of listed companies in China. (3) The Guiding Opinions is the systematic framework of China's current green financial policy. However, most of the related academic research focuses on policy interpretation, with a lack of empirical support at the data level. This paper provides micro-level empirical evidence of how to improve the implementation of green credit.
The policy implications of this paper are as follows. (1) Financial institutions should recognize that environmental reports may be used by enterprises for impression management. Therefore, when making credit decisions, banks should strengthen the scrutiny of corporate environmental responsibility performance. (2) In practice, implementing the green credit policy is necessary; however, the financing of heavily polluting enterprises should not be blindly restricted. Instead, a balance of punishments and incentives can achieve a win-win balance of environmental protection and economic development. (3) Building a green financial system is a long-term project. Therefore, all departments should continue to cooperate with each other to ensure the appropriate and sustainable implementation of the green credit policy. (4) Regulators should improve the environmental information disclosure system and focus on the supervision of companies whose words and deeds are inconsistent, supplemented by certain punishment measures.

With climate change becoming a social and development issue of great concern, carbon emission peak and carbon neutrality have become critical tasks in China at this stage. How to promote green transformation and achieve high-quality development has received broad discussion. Strong protection of environmental rule of law is indispensable to facilitate green orientation in financial markets under the “market-led and government-guided” principle. Moreover, bringing capital vitality to green transformation is an important embodiment of improving the level of financial servicing entity economy. Hence, to explore the coordinated development of economy and ecology and improve the functions of financial markets in the new era, it is of great practical significance to examine the real effects of the environmental rule of law construction in enterprises and financial markets.
Based on a quasi-natural experiment on the establishment of specialized environmental courts (EC) in China's Intermediate People's Courts, we exploit the staggered difference-in-difference-in-differences (DDD) method to examine the impact of the environmental rule of law on the cost of bond financing, utilizing a data set of corporate bonds, enterprise bonds and medium-term notes issued from 2008 to 2019. We find that after the establishment of the intermediate EC, local firms in high-pollution industries face higher transition risks due to environmental policies. Their credit spreads significantly increase by about 28.4 basis points (about 12% of the average credit spreads) in our sample, indicating that improved regional environmental justice capacity promotes the capital market pricing of the transition risks induced by environmental policy. We then propose and empirically test the underlying mechanisms of the effect of EC establishment on bond financing cost. We find that the environmental rule of law enhanced by EC raises the bond financing cost of firms in high-pollution industries by aggravating the exposure of environmental litigation risks, strengthening external environmental monitoring, increasing operating costs, and sub-optimizing resources allocations in operating activities. Further analysis finds that the impact of EC establishment on bond financing costs is greater in the sample with better legal environments and stronger government incentives for environmental governance. To address the endogeneity of EC establishment, we adopt the propensity score matching method, control for more regional characteristics, add more fixed effects, and investigate the dynamic impacts of EC establishment. In addition, the conclusions remain robust to the use of alternative measures of high-pollution firms, the use of two-way clusters, and the consideration of bond types.
This paper contributes to several strands of literature. First, based on prior literature on the economic effects of environmental regulation, this study provides empirical evidence on how regional environmental justice capacity enhancement promotes the green-oriented function of capital markets. Second, this paper supplements the pricing mechanisms of firms' transition risks under the construction of environmental rule of law. Third, the paper contributes to the literature on law and finance from the perspective of promoting environmental justice efficiency.
This paper has important policy implications in the pricing of transition risks and the construction of environmental justice under the process of carbon emission peak and carbon neutrality. Strong protection of environmental rule of law plays an important role in promoting long-term coordination of policy guidance and financial markets' operation, and cultivating green investment philosophy and ability. Under advanced regional environmental rule of law represented by the establishment of EC, firms need to promptly prevent and resolve transition risks and improve environmental performance to achieve comparative competitive advantages in the new era of high-quality development. In the future, the effects of environmental rule of law on improving ecological governance and accelerating the green transformation of the economy should be further strengthened in the joint efforts of legislation, justice, law enforcement, government, and public concerns.

In recent years, trade protectionism has increased globally, exacerbating trade frictions between countries, such as those between China and the United States. To cope with these adverse effects, the Ministry of Finance and the State Taxation Administration of China have successively increased the export tax rebate for some products. Meanwhile, employment and foreign trade are major issues in China's economy. Therefore, exploring the effect of China's export tax rebate policy on employment and foreign trade is of great theoretical and practical significance. Taking Sino-US trade friction as an example, this paper examines the mechanism by which China's export tax rebate policy stabilizes employment and foreign trade and how it mitigates trade friction using dynamic stochastic general equilibrium (DSGE) model.
First, this paper studies the cyclical characteristics of China's employment and net exports. Quarterly data from 1994 to 2020 show that employment is relatively stable. However, net exports are highly volatile. China's employment and net exports have weak procyclical characteristics that are significantly different from other countries and the simulation results of other DSGE models in the literature. Second, to explain the cyclical characteristics of China's employment and net exports, this paper constructs a symmetrical two-country open-economy DSGE model with an incomplete financial market and incomplete price pass-through. Using macro data from China and the United States to calibrate the model, the numerical simulation shows that the model better fits the cyclical characteristics of China's employment and net exports under the shock of domestic export tax rebates and other countries' technology shock. The wealth and expenditure transfer effects caused by the change in terms of trade are the main internal transmission mechanisms.
To clarify the mechanism of the export tax rebate effect, this paper uses Sino-US trade friction to conduct a counterfactual experiment to explore whether increasing the export tax rebate can stabilize employment and foreign trade. The simulation shows that when China unilaterally increases its export tax rebate by 1%, employment increases by 0.05%, and net exports increase by 0.28% and then decrease gradually, showing strong persistence. Increasing the export tax rebate can stabilize employment and foreign trade. A 1% increase in both China's export tax rebate and the United States' import tariff increases employment in China by 0.03% and net exports by 0.16%, and then employment and net exports decrease gradually and show strong persistence. Lerner neutrality is not established. Although the effect of the export tax rebate in stabilizing employment and foreign trade is currently weakened, it remains effective. Therefore, China's export tax rebate policy not only completely offsets the adverse impact of other countries' tariff increased on China's employment and net exports, but also produces a positive net effect. Although the net effect of increasing the export tax rebate is small, it indeed helps stabilize employment and foreign trade. Furthermore, the Bayesian estimation method proves that this conclusion is robust.
This paper makes two contributions to the literature. First, it expands the literature on the cyclical characteristics of China's employment and net exports. The two-country open-economy model in this paper not only explains these cyclical characteristics but also explores the internal mechanism of the effect of China's export tax rebate policy. Second, the two-country open-economy model can simulate and evaluate the effect of China's increasing export tax rebate on stabilizing employment and foreign trade in various circumstances.

The recent explosion of Chinese local government debt has raised alarm among investors and regulators.According to China's National Audit Office's government debt report, Chinese local governments had accrued implicit and explicit debts totaling 17.89 trillion renminbi (RMB) by June 2013.The lack of a systematic measurement system for Chinese local government debt has long been a problem, especially for city-level governments, as their debt is mostly implicit.Chengtou bonds, a unique type of bond that combines the features of municipal and corporate bonds, are deeply rooted in the history of the Chinese government's administrative system reform.Lacking the authority to independently issue debt due to the 1994 Budget Law, Chinese local governments set up local government financing vehicles (LGFVs) to issue so-called chengtou bonds.While these bonds are commonly understood as carrying an implicit government guarantee, the identity of the implicit guarantor is unclear.
In this article, we examine to what extent local government implicit debt affects the pricing of chengtou bonds.We further explore variations in the implicit guarantor that is recognized by the market.We first construct a measure for city-level local government implicit debt.As debt owed by LGFVs accounts for a large portion of city-level governments' debt, using the public disclosures of bond-issuing firms, we total all of the outstanding interest-bearing debt of LGFVs under the jurisdiction of a local government to obtain a proxy for total implicit city-level debt.We then divide the total interest-bearing debt by local government revenue, local gross domestic product (GDP), and local fixed-asset investment to obtain three local government implicit debt ratios.
We first hypothesize that if the market believes that chengtou bonds carry an implicit government guarantee, local government implicit debt ratios should be related to the yield spread of chengtou bonds.Consistent with this hypothesis, we find that higher local government implicit debt ratios are associated with higher yield spreads of chengtou bonds at the city level.This result holds in both the secondary and primary market samples.
Next, we explore the time-varying identity of the implicit guarantor using default events and government policy changes.In April 2011, Yunnan Highway, a LGFV owned by Yunnan Province, defaulted on some outstanding bank loans.Although the crisis was not directly related to chengtou bonds and was finally resolved with government intervention, this event may have significantly impacted investors' recognition of the risks associated with chengtou bonds.We find that the relationship between the city-level government implicit debt ratios and the yield spreads of chengtou bonds did not exist prior to the Yunan Highway default event and became significant only afterwards.This result is consistent with the arguement that investors initially believed the central government to be the guarantor of chengtou bonds and ignored the implicit debt burden of local governments.Investors only began paying attention to city-level government implicit debt after the 2011 default event.
In October 2014, the State Council issued Directive No.43 to clarify the relationship between local governments and LGFVs.This document makes it clear that city governments can swap their LGFVs' debt for municipal bonds issued directly by provincial governments.We thus hypothesize that after the issuance of Directive No.43, provincial government implicit debt ratios become important in the pricing of chengtou bonds issued by city-level LGFVs.Indeed, we discover that provincial government implicit debt ratios are significantly positively related to chengtou bond yield spreads after October 2014.
In summary, our evidence suggests that the identity of the implicit guarantor of city-level chengtou bonds has shifted over time from the central government to city-level governments, and more recently, to city-plus province-level governments.
Although implicit guarantees reduce the borrowing costs of local governments, due to the lack of formal legal protection, the pricing of chengtou bonds is significantly affected by market events and government regulations that shift market perceptions regarding the identity of the implicit guarantor.The uncertainty related to the implicit guarantee creates unnecessary risk and may potentially increase local governments' borrowing costs in comparison to them raising debt independently.

In Recent years, China's bond market has achieved rapid development.However, since China's first default case of “11 Chaori Bond” in 2014, the rigid bond repayment rule has been violated and bond default has occurred frequently.This has caused investors and regulatory authorities to worry about default risk in China's bond market because bond defaults not only harm the interests of investors but may also lead to systemic financial risk.At the corporate level, bond defaults are closely related to the financial performance, solvency, and information asymmetry of the issuers.Therefore, it is of great importance to seek innovative governance mechanisms that can help reduce information asymmetry, improve corporate performance, and strengthen financial stability to protect bondholders' wealth.
An important change that has occurred in China's corporate governance mechanisms in recent years is that minority shareholders have begun to actively participate in corporate decision-making through online voting.However, the consequences of minority shareholders' participation in corporate governance to safeguard their interests are unclear.Research generally suggests that minority shareholder activism positively affects the company and shareholder interests; however, few studies examine the impacts of such activism on external stakeholders.
Using online voting data from all listed companies in the Shenzhen Stock Exchange from 2008 to 2018, this paper explores spillover effects of minority shareholder activism on bondholders' wealth (who are among the most important external stakeholders of a company) and empirically examines the internal mechanism and moderating effect.The results show the following: (1) Although minority shareholders subjectively participate in corporate governance to protect their interests, their behavior can also significantly increase bondholders' wealth, and this positive spillover effect still exists after controlling for potential endogeneity; (2) Exploring its internal mechanism, it is found that minority shareholder activism does not significantly affect the quality of corporate information disclosure and that the positive spillover effects of this activism on the wealth of bondholders is mainly achieved through improving the company's performance and enhancing its financial stability; (3) Positive spillover effects are stronger when the internal governance environment of the company is poor, investors have learning effects, or external information channels work effectively.
The innovations and contributions of this paper are as follows.First, unlike previous studies focusing on the impact of minority shareholder activism on the company and shareholder interests, this paper examines the impact of such activism on bondholders' wealth, which may help regulatory authorities develop new ways to safeguard the interests of bondholders and promote the healthy development of the bond market.Second, based on corporate performance, financial stability, and information disclosure quality, this paper investigates the internal mechanism of the positive spillover effects of minority shareholders on bondholders' wealth, thus enriching research on the governance effect of minority shareholder activism.Third, by examining the potential factors affecting minority shareholder activism, this paper provides a means for minority shareholders to better participate in corporate governance through online voting.
Based on the above conclusions, we put forward the following policy suggestions: First, Regulatory authorities should strengthen the education and guidance of minority shareholders and effectively use the positive spillover effects of minority shareholder activism.Second,regulatory authorities should establish a better institutional environment to ensure the active participation of minority shareholders in corporate governance, and companies should provide convenient conditions to help minority shareholders make suggestions.In the practice,regulatory authorities should continue to promote the construction and effective use of online voting platforms and improve the relevant voting and trading rules; companies should adjust the traditional positioning of minority shareholders, optimize the corporate governance structure, improve the enthusiasm of minority shareholders to participate in corporate governance, and strengthen the education of minority shareholders so that they can participate in the company's decision-making more effectively and in more aspects.