The Great Wall of Debt: Real Estate, Political Risk, and Chinese Local Government Financing Cost

48 Pages Posted: 7 May 2015 Last revised: 29 Jul 2019

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Jennie Bai

Georgetown University - McDonough School of Business; National Bureau of Economic Research (NBER)

Hao Zhou

Tsinghua University - PBC School of Finance; SUSTech Business School

Date Written: July 18, 2018

Abstract

Chengtou bond is the soli asset with market prices that can capture the funding cost of Chinese local government debt. In contrast to the U.S. municipal bonds, Chengtou bonds are issued by private corporations but implicitly guaranteed by the local hence central governments, which are reflected by novel risk characteristics --- real estate GDP and political risk. One standard deviation increase in local real estate GDP (political risk) corresponds to 10 (9) basis points decrease (increase) in bond yields, respectively. However, conditional on political risk, real estate GDP actually increases bond yields, suggesting that only local governments with low political risk can enjoy the low funding costs driven by high real estate growth.

Keywords: Chinese local government debt, real estate, political risk, government guarantee

JEL Classification: D73, G12, G14, G28, H74

Suggested Citation

Ang, Andrew and Bai, Jennie and Zhou, Hao, The Great Wall of Debt: Real Estate, Political Risk, and Chinese Local Government Financing Cost (July 18, 2018). Georgetown McDonough School of Business Research Paper No. 2603022, PBCSF-NIFR Research Paper No. 15-02, Available at SSRN: https://ssrn.com/abstract=2603022 or http://dx.doi.org/10.2139/ssrn.2603022

Andrew Ang

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Jennie Bai (Contact Author)

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

HOME PAGE: http://www.jenniebai.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hao Zhou

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
+86-10-62790655 (Phone)

SUSTech Business School ( email )

1088 Xueyuan Avenue, Nanshan District
Southern University of Science and Technology
Shenzhen, Guangdong 518055
China

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