Fact or fiction: Implicit government guarantees in China’s corporate bond market

Walker, Thomas; Zhang, Xueying; Zhang, Aoran; Wang, Yulin

doi:10.1016/j.jimonfin.2021.102414

Cited by 46 publications

(4 citation statements)

References 32 publications

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“…Bond market liberalization allows foreign investors greater access to domestic debt securities, fostering crossborder capital flows and increasing the demand for the domestic currency. China's gradual opening of its bond market to foreign investors, through initiatives such as the Bond Connect program and the inclusion of Chinese bonds in global indices, has led to increased foreign participation in its bond market (Walker et al, 2021). Empirical evidence suggests that the opening of bond markets can spur currency flowback by attracting foreign capital seeking higher returns and portfolio diversification.…”

Section: Literature Reviewmentioning

confidence: 99%

Currency Flowback and Opening Up Bond Markets

Guo,

Zhang,

Zhou

2024

IJIE

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The internationalization of the Renminbi (RMB) has become a practical reality in global financial markets and economic dynamics. Understanding the mechanism of currency flowback, the movement of the RMB back to China’s domestic financial system after being utilized abroad, is crucial in comprehending the evolving landscape of global finance and China’s position within it. This article investigates the relationship between currency flowback and RMB internationalization through theoretical frameworks, empirical evidence, and model simulations. The opening of bond markets plays a pivotal role in facilitating currency flowback and promoting RMB internationalization by attracting foreign investors and increasing the liquidity of domestic bond markets. A Dynamic Stochastic General Equilibrium (DSGE) model incorporating bond market opening-up illustrates the potential for improved financial stability and economic resilience. However, the conclusions drawn from simulations are contingent on maintaining a moderate foreign holding ratio of domestic bonds to mitigate risks associated with excessive foreign ownership.

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Section: Literature Reviewmentioning

confidence: 99%

Currency Flowback and Opening Up Bond Markets

Guo,

Zhang,

Zhou

2024

IJIE

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“…The first graph indicates a volatile phase for the Federal funds target rate between the 1970s and 1980s, peaking close to 20% before eventually plummeting. Such high rates were a response to combat the stagflation of that era [10]. Data source: https://www.nytimes.com/ Photo credit: Original The shaded regions titled "Recessions" highlight the times when the U.S. economy faced downturns.…”

Section: The Federal Reserve's Interest Rate Hike Policymentioning

confidence: 99%

The Transmissive Effect of the Federal Reserve's Interest Rate Hike on China's Government Bond Yields in the Context of the COVID-19 Pandemic

Wen

2024

HBEM

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The global economy underwent profound shifts due to the COVID-19 pandemic, bringing monetary policies of major economies, such as the U.S., to the forefront. As the U.S. Federal Reserve's decisions can resonate globally, understanding their ramifications on China's bond market post-COVID-19 becomes paramount. This research delves into the ripple effects of U.S. monetary policy on China's bond market dynamics. Utilizing a mixed methodology, the study incorporates both quantitative and qualitative analyses based on financial records and historical data. Preliminary findings highlight the U.S.'s aggressive monetary responses during the pandemic, and how China's bond market, with high yields, presents a competitive return. Additionally, China's swift economic recovery and robust export figures reinforce its financial resilience. The study further examines the transmission effect of the U.S. Federal Reserve's interest rate policies on China's government bond yields. Ultimately, the research aims to offer comprehensive insights to navigate future economic landscapes in light of global challenges and monetary policies.

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“…Their financial products were backed by payment guarantees from the local government and the use rights of the land. The banks were confident that the local government would not default on debt or become bankrupt because of the requirement by the central government for no local systemic financial risk 10 and the soft budget constraint, which means that the higher-level government would bail out the lower-level ones (Walker et al, 2021). The term ‘ Chengtou belief’ was coined to describe the situation in which the banks almost blindly invested in the financial products of the platforms regardless of their financial situation and that of the local government.…”

Section: The Adaptable Marketmentioning

confidence: 99%

Adaptable state-controlled market actors: Underwriters and investors in the market of local government bonds in China

Zhang

2023

Environ Plan A

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Local government bonds (LGBs) have become the most important tool of the Chinese state for financing infrastructure projects. The underwriters and investors in LGBs are mostly commercial banks, with state actors holding the overwhelming majority of shares. We call these state-controlled market actors. This article investigates the role of state-controlled market actors in LGB issuance to extend the understanding of state actors and state–market relations in the financialisation of urban governance. The findings show that they underwrite and invest in LGBs to support the government's development objectives and make profits. They can hardly affect the government to create the terms and conditions of bonds to favour their financial interests, but they manage to make substantial profits. They follow the policy trends to identify LGBs as risk-free and reflexively change their investment priority towards the bonds. Due to the low interest rates, the banks mainly profit from bond trading in the secondary market and fiscal fund investment. There are preferential policies for LGB trading in the secondary market, and local governments deposit fiscal funds in the banks to motivate them to do LGB business. We argue that reflexively making investment decisions according to the policy environment and making profits by exploiting political resources represented by preferential policies and fiscal funds show the adaptability of the state-controlled market actors.

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Fact or fiction: Implicit government guarantees in China’s corporate bond market

Cited by 46 publications

References 32 publications

Currency Flowback and Opening Up Bond Markets

Currency Flowback and Opening Up Bond Markets

The Transmissive Effect of the Federal Reserve's Interest Rate Hike on China's Government Bond Yields in the Context of the COVID-19 Pandemic

Adaptable state-controlled market actors: Underwriters and investors in the market of local government bonds in China

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