The Impact of Implicit Guarantees and Market-Based Guarantees on the Issuance Spreads of Urban Investment Bonds
Abstract
Preventing and defusing local government debt risks is a core issue in current macroeconomic governance. Against the backdrop of policies that promote the separation of credit between urban investment platforms and local governments, market pricing remains constrained by expectations of implicit guarantees. Using urban investment bonds issued between 2014 and 2024 as the research sample, this paper constructs an issuer‑bond and guarantor‑bond bipartite network, introduces two dynamic indicators: issuer node degree and guarantor node degree, and employs a quasi‑natural experiment based on a series of debt resolution policies to examine the interactive effects of policy regulation and network structure on issuance spreads. The empirical results show that policy effects exhibit significant heterogeneity; the pricing weight of network characteristics is reshaped with the policy environment, where issuer node degree transforms into a market‑oriented signal, while guarantor node degree reverses into a hub for risk transmission. Urban investment bond pricing deviates systematically from traditional financial theories, with variables capturing government credit linkages acting as the core pricing determinants. The findings of this paper indicate that the risk pricing of urban investment bonds is undergoing a transition from relationship dependence to fundamental risk pricing, which provides empirical support for identifying implicit guarantees and preventing risk contagion within guarantee networks.
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Introduction
Against the backdrop of the fiscal revenue-expenditure gap caused by the 1994 tax-sharing reform, urban investment bonds emerged as a “quasi-municipal bond” with Chinese characteristics. By the end of 2024, the outstanding balance of implicit local government debt had reached 10.5 trillion yuan, and its risk transmission has become a core issue in the establishment of a joint prevention and control mechanism for fiscal and financial risks (Qiu et al., 2022). Since the issuance of Document No. 43 [2014] of the State Council, which established the debt governance framework, China has continuously promoted the resolution of implicit debt through Document No. 50, Document No. 35, and the “package debt resolution” policies. However, discrepancies still exist between the market pricing mechanism and policy orientation, highlighting the path-dependent nature of implicit guarantee expectations (Cao, 2023). Notably, existing studies are mostly limited to the analysis of traditional financial indicators and fail to reveal how the structural position of issuers in the debt network affects risk pricing. Against the background that policies continue to weaken unified implicit guarantees, structural indicators such as network node degree may reshape the formation mechanism of credit spreads through dual channels of information transmission and risk exposure. By constructing two dynamic network indicators—issuer node degree and guarantor node degree—this paper systematically analyzes the interactive effects of policy regulation and network structure on the issuance spreads of urban investment bonds, aiming to provide theoretical references and practical evidence for improving the debt governance system and preventing systemic financial risks.
Conclusion
This paper constructs a dynamic network indicator system to systematically examine the interactive effects of policies (Document 43, Document 50, pandemic shock, and Document 35) and network structure on the issuance spreads of urban investment bonds. The conclusions are as follows:
First, the policy effects exhibit significant heterogeneity, depending on the market’s interpretation of policy connotations. Debt replacement under Document 43 was regarded as credit endorsement, thus reducing spreads; Document 50 effectively transmitted the signal of breaking rigid repayment; and targeted support under Document 35 strengthened expectations of government bailouts. Second, the pricing weight of network characteristics is structurally reshaped with the policy environment: issuer node degree shifts from a policy transmission channel to a market-oriented signal, while guarantor node degree reverses from credit enhancement to a risk transmission hub, confirming the transition of the pricing benchmark from relationship dependence to risk-based pricing. Third, the pricing of urban investment bonds systematically deviates from traditional financial theories. Variables related to government credit, such as enterprise ownership and issuer rating, become central to pricing, highlighting the dominant role of “government credit discount”.
Accordingly, we propose the following recommendations: improve the policy transmission mechanism and stabilize market expectations through regular communication; establish a network risk monitoring system, incorporate node degree into the regulatory framework, and promote the diversification of the guarantee system; deepen the reform of information disclosure and credit rating, strengthen the evaluation of individual solvency, and provide institutional support for market-oriented pricing. This study provides a new perspective for understanding the pricing mechanism of urban investment bonds and also offers empirical evidence for debt risk prevention and control.
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