2203 
2228At the end of 2022, the Central Economic Work Conference elevated the prevention and resolution of local government debt risks and the strengthening of comprehensive governance of financing platform companies to an extremely important level. Clarifying the impact of government implicit guarantee expectations on urban investment bonds is conducive to achieving a balance between preventing financial risks and local debt risks, and promoting high-quality development of finance and economy.
Based on the perspective of exogenous policy shocks, this paper explores the impact of the decline in government implicit guarantee expectations on the liquidity of urban investment bonds. The study finds that after the implementation of the “breaking the rigid exchange” policy in 2014, the decline in government implicit guarantee expectations led to a significant deterioration in the liquidity of urban investment bonds. Mechanism analysis shows that default risk is an important channel for government implicit guarantee to affect bond liquidity. The decrease in government implicit guarantee expectations can increase investors’ expectations of default risk for urban investment bonds. The selling decisions taken by investors to avoid expected default losses will further reduce bond liquidity. Further analysis reveals that the “breaking the rigid exchange” policy leads to a decrease in bond liquidity, significantly increasing the debt financing costs of urban investment companies and the credit spread in the secondary market of urban investment bonds.
Therefore, government departments should gradually promote policies related to weakening implicit guarantee expectations, strictly monitor the liquidity risk impact caused by the rising default risk of urban investment bonds, and especially focus on regulating the liquidity of some urban investment bonds that are sensitive to changes in implicit guarantee expectations. Urban investment companies should reduce their reliance on implicit government guarantees in the process of debt financing, focus on improving their profitability, and actively adapt to market-oriented reforms. Investors should form reasonable expectations for the debt repayment risk of local financing platform companies under the guidance of the government, and price the returns and risks of urban investment bonds rationally.
