As of the end of 2023, local government finance vehicles (LGFVs) had 72 trillion yuan in interest-bearing debt, with only a 71.48% coverage ratio for maturing debt from operating cash flow. Their average ROA was just 0.5%, highlighting significant debt repayment pressure and liquidity risks. Bank credit, crucial for LGFV liquidity management, helps mitigate funding disruptions. Despite the rising bank credit lines for LGFVs, no studies have yet explored the impact and mechanism of changes in bank credit lines and the credit utilization rate on urban investment bond pricing in the secondary market.

Based on the trading data of urban investment bonds, the bank credit data, the financial data of LGFVs, and the regional macroeconomic fundamentals between 2011 and 2023, this paper empirically analyzes the impact and mechanism of bank credit lines and the credit utilization rate on the yield spread of urban investment bonds. The study finds that, obtaining higher bank credit lines significantly reduces the yield spread of urban investment bonds, implying that higher bank credit lines send positive signals to the market. However, when bank credit lines are fixed, an increase in the credit utilization rate will significantly widen the yield spread of urban investment bonds, implying that a higher credit utilization rate sends negative signals to the market. Mechanism testing shows that bank credit lines and the credit utilization rate primarily influence financing constraints and signal transmission to affect urban investment bond pricing. Furthermore, the dual effects are particularly significant for urban investment bonds with weaker credit quality. Further discussions reveal that an increase in bank credit lines and a decrease in the credit utilization rate also significantly reduce the issuance costs of urban investment bonds. An increase in bank credit lines lowers the issuance of urban investment bonds for debt rollover and operating funds, but raises it for investment.

The main contributions of this paper are as follows: First, it explores the impact of bank credit on pricing in both the primary and secondary markets of urban investment bonds, providing a new perspective and evidence for understanding urban investment bond pricing. Second, it investigates the impact of the credit utilization rate on urban investment bond pricing and finds that the credit utilization rate can provide additional information beyond credit lines. Furthermore, the impact of bank credit lines and the credit utilization rate on the urban investment bond market exerts an opposing effect. Third, it constructs a dual-path mechanism of relieving financing constraints and transmitting signals, deepening the application of financing constraints and information asymmetry theories in bond market pricing.