China's Local Government Bond Market

Abstract

Local governments play a significant role in China's public finance and fiscal operations. The size of local government debt has grown rapidly over the past years, exceeding the stock of sovereign debt in China. How does this development compare to other countries and what policies can foster the sound development of the bond markets? This paper finds that despite its rapid growth, the local government bond market is still underdeveloped. Severe impediments-low liquidity, weak credit discipline, structural fiscal deficit in local governments-have become more visible. Reforms to develop a sound local government bond market should harmonize tax and regulations, build liquidity, and advance fiscal reforms to tighten off-budget borrowing and address intergovernmental imbalances.

The Financial Value of the Within-Government Political Network: Evidence From Chinese Municipal Corporate Bonds

“…(2) and (3) in Table 4 show that the interaction terms have significantly positive coefficients, consistent with our hypothesis. The negative standalone impacts of the indices on the issuance yield spreads are also consistent with Lam and Wang (2019), as the issuance is costly in underdeveloped market environments.…”

“…Second, we examine whether regional heterogeneities in institutionalization influence the political network's strength. Guanxi plays a larger role in the absence of institutional support (Xin and Pearce, 1996), and circumstances such as the lack of liquidity and disclosure are considered a major impediment of the MCB market (Lam and Wang, 2019). Therefore, we expect that the influence of the political network is more pronounced in regions with underdeveloped financial markets and legal systems.…”

Financial System and Economic Development in Africa: A Review and Policy Recommendations

“…Wealthy provinces have more debt but lower debt per GDP comparing to poor provinces. Currently, 37 out of 53 major economies permit local government to issue bonds (Lam and Wang, 2018). Understanding the role of local government in a country may inform African economies on how they should structure their municipal or local government bonds.…”