The Great Wall of Debt: Corruption, Real Estate, and Chinese Local Government Credit Spreads∗
نویسندگان
چکیده
Issued by local government financing vehicles and backed mostly by land sales, Chengtou bonds are an important source of financing for Chinese local governments. We identify large heterogeneity in Chengtou bond yields, which is not supposed to exist since they are implicitly guaranteed by the central government. We find that corruption in China has a significant effect on local government credit spreads, with one standard deviation increase in ”Tigers” or ”Flies” corresponding to 9 or 5 basis points in elevated Chengtou bond yields. We measure corruption using the graft cases investigated by the Central Commission of Discipline and Investigation (CCDI), using the rank-weighted average and total number of cases as proxies for the depth and width of corruptions, ”Tigers” and ”Flies”, respectively. Real estate GDP is the most prominent determinant of local government credit spreads, and the effect of corruption works mainly through the channel of real estate — more corruption clearly depresses the real estate value. Since the anti-corruption campaign started in late 2012, the effect of corruption has become highly significant and irreplaceable through the real estate
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