How does Fiscal Regulation Affect Bond Market Pricing? Evidence from a Quasi-natural Experiment Based on Financing Platform Transformation Policies

Yao Dongmin, Dong Hongru, Meng Jing, Luo Wenqi

Journal of Finance and Economics Vol. 50, Issue 06, pp. 34 - 48 (2024)  DOI:10.16538/j.cnki.jfe.20240413.201

Summary

The Report to the 20th National Congress of the Communist Party of China pointed out the need to establish a modern fiscal and financial system, ensure financial stability, and regulate and guide the healthy development of capital in accordance with the law. Thus, exploring the policy efficacy of fiscal regulation in financial markets is crucial for further refining the regulatory system of state-owned financial capital and achieving synergy in fiscal and financial policies.

This paper takes the “Financing Platform Transformation” policy documents issued across various regions since 2015 as a typical policy shock and event window to explore how stringent fiscal regulation targeted at bond issuers affects the primary bond market. Employing comprehensive panel data from 3269 local financing platforms and their respective prefecture-level cities from 2010 to 2021, the study systematically applies multiple causal inference methods, and finds that these documents convey clear signals of “no bailouts” “stringent regulation” and “promoting transformation”, which have different impacts on the potential credit risk of local financing platforms with different risk conditions, and manifest as a “premium” (or “discount”) effect on bond issuance. Specifically, the policy signals significantly increase the weighted average issuance spread in the short term for local financing platforms in the primary bond market; in regions with a higher debt level and prior bond defaults, the weighted average issuance spread significantly increase under the impact of the policy signals; in regions with a lower debt level and no prior bond defaults, the pricing exhibits the opposite trend.

The marginal contributions of this paper are as follows: First, it considers the potential credit risk of local financing platforms as the main mechanism, proposes an analytical framework on how fiscal regulation affects bond pricing, and validates the effectiveness of the analysis through empirical methods, supplementing existing research on the impact mechanism of fiscal regulation on bond pricing. Second, it takes policy documents on financing platform transformation issued by various regions as the main research object, enriching the content of fiscal regulation policy evaluation. Third, it weights the bond data by issuing entity to create panel data for financing platforms and explores how fiscal regulation affects bond pricing at the local financing platform level, enriching the research on the micro-operational mechanism of local financing platforms.

Keywords

fiscal regulation; bond pricing; local financing platforms; potential credit risk; credit spread