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CHINA JOURNAL OF ACCOUNTING STUDIES 2019, VOL. 7, NO. 4, 524–541 https://doi.org/10.1080/21697213.2019.1748837 ARTICLE Monetary policy, differences among issuing agencies, and the pricing of local government bonds a a b a Jun Pan , Yipin Yu , Liangliang Wang and Xuefeng Jing a b School of Accounting, Nanjing Audit University, Nanjing, China; School of Economics and Management, Southeast University, Nanjing, China ABSTRACT KEYWORDS Monetary policy; local Based on a sample of local government bonds from 2015 to 2018, government bonds; this paper examines the impact of monetary policy on the pricing of differences among issuing local government bonds. Furthermore, this paper explores how the agencies; bond pricing differences among issuing agencies affect this relationship. The empirical results show that loose monetary policy can reduce the spread of local government bonds. The degree of fiscal decentrali- sation and the governance ability of the government could mod- erate the impact of monetary policy on the spread of local government bond issuance, the debt risk of local government might increase the impact of monetary policy on the spread of local government bond issuance. In addition, tests on the inter- mediary mechanism by which monetary policy affects local govern- ment bond pricing show that loose monetary policy can reduce the spread of local government bond issuance by increasing the supply of market capital and improving the financial status of local governments. 1. Introduction In recent years, with the slowdown of economic growth and the acceleration of urbanisation in China, the problem of local government debt risk has attracted widespread attention. In October 2014, the State Council issued the policy ‘Opinions on Strengthening the Management of Local Government Debt’, which clearly stressed that local governments should assume the obligation to repay their own debts and that the central government should not be responsible for assistance. The Budget Law of the People’s Republic of China, which was formally implemented in 2015, further stipulated that local governments could borrow debts by issuing local government bonds within the limits set by the State Council. Compared with traditional financing platform loans and urban investment bonds, local government bonds have the advantages of controllable risks, lower costs and refinancing, which play a positive role in preventing the risks of government debt, promoting the reform of the fiscal system and maintaining the steady and healthy development of the economy. The local government bonds in China are mainly based on treasury bond yield and are priced at floating interest rates. Regarding factors influencing the pricing of local CONTACT Liangliang Wang acwangll@126.com School of Economics and Management, Southeast University, No. 2, Sipailou Road, Xuanwu District, Nanjing, P.R.China, 210096 Paper accepted by Shouhua Zhou. © 2020 Accounting Society of China CHINA JOURNAL OF ACCOUNTING STUDIES 525 government bonds, most of the existing literature is based on the characteristics of bonds (Liang et al., 2017) and regional economic development (Liu et al., 2017; Wang & Fang, 2018) and the financial situation of local governments (Hong et al., 2018; Liu & Liu, 2017)and government audits (Pan et al., 2019). Few studies have analysed the pricing of local government bond issuance from the perspective of the macroeconomic environment and policy regulation. Monetary policy, as an important tool of macroeconomic regulation and control, needs to be adjusted according to various objectives, such as stabilising the currency value, maintaining growth and preventing or mitigating financial risks at different stages of economic development (Pan, 2016; Zhang, 2015). However, since monetary policy cannot directly affect microeconomic activities, it may be necessary to conduct policy transmis- sion through relevant media. The existing studies on the economic consequences of monetary policy mainly focus on the impact of monetary policy on banks and companies, such as the impact of monetary policy on banks’ risk appetite level or corporate invest- ment and financing behaviour, thus affecting economic activities (Ashcraft., 2006; Jiang & Rao, 2011; Li et al., 2015; Oliner & Rudebusch, 1996; Zhang & He, 2012), but pay less attention to the important role of the bond market in the transmission of monetary policy. As an important part of China’s bond market, the pricing of local government bonds affects not only the financing cost of local governments but also whether monetary policy can effectively play a guiding role in optimising economic structure and preventing resource mismatch. Therefore, does monetary policy affect the pricing of local govern- ment bonds? If so, how? In the face of monetary policy fluctuations, will bond market participants respond differently according to the differences of the bond issuers? The answers to these questions represent not only an in-depth exploration of the monetary policy impact on the pricing mechanism of local government bonds but also an expan- sion of the research on the economic consequences of monetary policy. This paper takes local government bonds from 2015 to 2018 as a research sample to empirically test the impact of monetary policy on the pricing of local government bond issuance. The study found that loose monetary policy can reduce the spread of local government bond issuance. The difference in bond issuers affects the relationship between monetary policy and local government bond pricing: the higher the degree of fiscal decentralisation and the stronger the governance ability of the government are, the weaker the influence of monetary policy on the spread of local government bonds; and the higher the risk of local government debt is, the stronger the influence of monetary policy on the spread of local government bond issuance. The mediating effect test shows that loose monetary policy can reduce the spread of local government bonds by increas- ing the supply of market credit resources and improving the fiscal situation of local governments. The possible research contributions of this paper are as follows: (1) In addition to considering the important macro factor of monetary policy, this paper con- ducts an in-depth analysis of the pricing of local government bonds, provides empirical evidence of the influence of monetary policy on the pricing of local government bonds, and enriches the research on the influencing factors of the pricing of local government bonds. (2) From the three dimensions of fiscal decentralisation, debt risks and govern- ment governance, this paper explores the influence of monetary policy on the pricing of local government bonds with attention to the possible role of differences among bonds’ issuers. (3) The paper reveals how the mechanism of monetary policy affects the pricing of 526 J. PAN, ET AL. local government bonds and finds that loose monetary policy can reduce the spread of local government bonds by increasing the supply of credit resources in the market and improving the financial situation of local government. The findings are helpful for explor- ing the impact of macromonetary policy on the bond market, deeply analysing the important role of monetary policy in defusing financial risks, providing reference and inspiration for the market-oriented issuance of local government bonds and minimising the debt risk of local governments. 2. Theoretical analysis and hypotheses development 2.1. Monetary policy and pricing of local government bond issuance The purpose of monetary policy regulation is to promote the effective allocation of resources and achieve the expected economic objectives. Some studies have con- sidered that the impacts of monetary policy on economic activities are mainly through monetary channels, credit channels and asset price channels (Mishkin, 1995). Among them, the monetary channel is mainly reflected in interest rate transmission. The classical Keynes IS-LM model summarises the interest rate trans- mission mechanism as follows: monetary policy changes affect the adjustment of interest rates in the money market and then affect the interest rates in the credit market and financial market, thereby affecting the expenditure of interest rate sensitive items (Taylor, 1993). The credit transmission mechanism shows that monetary policy can affect the expenditure of investors and consumers by influen- cing the availability of bank credit and then microeconomic activities. Asset price channels show that monetary policy influences the prices of a variety of assets, such as bonds, stocks and real estate, to achieve the goal of monetary policy regulation (Bai & Meng, 2015). In the real-world situation, monetary policy influ- ences economic activities not by a single transmission mechanism but by the effects of multiple mechanisms. Loose monetary policy is designed to import liquidity into the market but can cause liquidity to flood financial markets when physical transmission channels are blocked. Studies have found that the tight combination of monetary and financial policies can affect the bond market by influencing financing cost and circulation velocity (Tian & Xia, 2016). According to international research on municipal bonds, US monetary policy has a significant impact on the issuance costs of municipal bonds (Rosa, 2014), and its risk premium level is significantly related to the fiscal situation of local governments. The higher the government deficit and debt are, the higher the risk premium of municipal bonds (Bayoumi & Eichengreen, 1995; Schuknecht et al., 2009). In combination with other aspects of China’s bond market, loose monetary policy may reduce investors’ risk aversion level and negative expec- tations on the future development of companies, resulting in the decline of corpo- rate bond spreads (Xie & Wang, 2014). Loose monetary policy can also improve the probability and scale of issuance of urban investment bonds through liquidity channels and risk channels (Xiao et al., 2017). However, there are also studies suggesting that with the accelerated unification of China’s financial market, investors can optimise the allocation of resources through cross-market arbitrage transactions, CHINA JOURNAL OF ACCOUNTING STUDIES 527 resulting in a ‘seesaw’ effect between the stock market and the bond market (Shi et al., 2013): when monetary policy tends to be loose, investors hold bonds with low yields and may choose to invest in other assets, such as stocks, which will lead to falling bond prices and credit spread expansion. In China, the main issuers of local government bonds are provincial governments, and investors are mainly represented by the commercial banks of various types of financial institutions. The pricing of local government bonds depends largely on the economic strategies of local government and underwriters (Wang, 2018). To explore the monetary policy impacts on local government bond issuance pricing, this article analyzes the supply and demand of local government bonds. First, monetary policy has a certain impact on the fiscal situation of local governments. Loose monetary policy may stimulate consumption and investment, promote economic growth and thus increase tax revenues for local governments. In addition, loose monetary policy can promote an increase in asset prices, which leads to an increase in government land transfer income. On the other hand, the current debt of local governments is mainly composed of local government bonds and some stock debts in the form of non- governmental bonds. Loose monetary policy helps local governments repay debts and reduce their debt burden. As a result, loose monetary policy may improve the financial state of local governments. The quality of the fiscal situation affects the risk premium of local government bond issuance (Wang & Fang, 2018). The better the local economic situation is, the more stable the fiscal revenue is and the lower the bond issuance cost is (Wang et al., 2015). In contrast, if the local government’s financial situation is poor, the risk premium demanded by investors will be higher, which will lead to an increase in the spread of local government bond issuance (Jin et al., 2019). Second, loose monetary policy leads to a decline in the market interest rate, resulting in a relatively abundant money supply and spilling some credit resources into the financial market (Yi & Wang, 2002). The increase in fund liquidity is conducive to the issuance of local government bonds. Specifically, during the period of loose monetary policy, credit resources of commercial banks are relatively abundant, which requires certain channels for money and asset allocation. Because the business of commercial banks is relatively stable and conservative and risks are tightly controlled, commercial banks are likely to prefer local government bonds, which provide a high safety coefficient and steady income. Therefore, when monetary policy is loose, financial institutions may actively participate in the underwriting of local government bonds, and bond underwriters’ bidding helps reduce the issuance cost of local government bonds. In addition, the drops in market interest rates brought by the loose monetary policy may reduce the expected yield and capital return requirements of financial institutions on the allocation of local government bonds, which will lead to lower spreads on local government bond issuance. In summary, loose monetary policy can improve the government’s fiscal position and reduce the risk premium of its bonds. Furthermore, the reduced cost of using funds brought by the loose monetary policy can reduce the return requirements of investors on local government bonds. Therefore, this paper proposes the following hypothesis: Hypothesis 1: the looser the monetary policy is, the lower the spread on local government bond issuance. 528 J. PAN, ET AL. 2.2. The impact of the difference in issuing entities on the relationship between monetary policy and the pricing of local government bond issuance Taylor (1993) discussed the regional effect of monetary policy in the euro area and believed that differences in financial structure would lead to a regionally heterogeneous effect of unified monetary policy. There may also be differences in the effects of monetary policy within a country. Due to the large differences in the degree of marketisation and the level of economic and financial development among different regions in China, unified monetary policy may produce regionally heterogeneous effects. In addition, local governments can play a certain role in the implementation of monetary policy. With the deepening reform of fiscal decentralisation, local government economic deci- sion-making and resource allocation, local governments may influence the central gov- ernment’s implementation of monetary policy (Bai & Meng, 2015) and intervention in the development of the western regions through credit funds (Rao & Jiang, 2013). Considering the issue pricing of local government bonds, local governments may also influence the underwriters’ quotation behaviour in the bond issue market by controlling financial resources, such as financial deposits (Wang, 2018). As the issuing subject of local government bonds, there are large differences among provincial governments, which are reflected in the risk premium of local government bonds. When faced with the fluctuation of monetary policy, bond market participants react differently according to the differ- ences in issuing subjects. To test the role played by the differences of bond issuers in the process by which monetary policy influences the pricing of local government bond issuance, this paper conducts an analysis combining the three dimensions of fiscal decentralisation, debt risk and government governance. Fiscal and political incentives under the decentralisation framework are the core of Chinese governments’ governance (Fu, 2010). It has been considered that fiscal decentra- lisation represented by the separation of financial power and administrative power and the promotion and evaluation incentive system of local officials lead to an increase in debt risk in China (Chen & Li, 2015; Yang & Yang, 2014; Zhang & Jin, 2019). However, with the greater fiscal decentralisation of local government, transfer payments from the central government decrease accordingly, and local governments can reduce their expectations of the central government to act as ‘debt pockets’. Therefore, fiscal decentralisation may force local governments to compete, improve the efficiency of their use of funds, and more actively prevent debt risk (Qian & Roland, 1996). As local governments’ debt governance is included in the promotion assessment of officials, local officials must prevent and mitigate the risk of local debt. Moreover, tightening budget constraints, the crackdown on illegal borrowing by local governments and the imposition of a system of lifelong accountability have made local officials more cautious about promoting economic growth through debt investment. Local governments with a low degree of fiscal decentralisation are more dependent on transfer payments and tax rebates from the central government, and their fiscal revenue is unstable to a certain extent. If the expectations of central assistance and implicit guarantees are excluded, the costs of the local government bonds they issue may be higher. In contrast, the higher the degree of fiscal decentralisation in a region is, the stronger its economic and financial strength is, and the local government need not rely excessively on transfer payments from the central government. As a result, local government bonds issued by these governments are likely to be cheaper and less vulnerable to monetary policy shocks. CHINA JOURNAL OF ACCOUNTING STUDIES 529 Debt risk is an important index for measuring the credit risk premium of local government bonds. Generally, the higher the risk of local government debt is, the greater the spread of local government bond issuance (Liu & Liu, 2017; Liu et al., 2017). Specifically, if the risk of local government debt is high, which means that its future solvency is weak, investors will ask for higher risk premiums for the local government bonds issued, resulting in a higher spread of local government bonds. Due to the relatively high financing costs in normal times, regions with higher debt risks may gain more policy benefits when they are affected by loose monetary policies; that is, the pricing of local government bond issuance is greatly affected by monetary policies. The only way for local government to transform is to build a service-oriented government and realise the modernisation of its governance capacity. The strong governance capacity of a government indicates that the government can better play its service function and create a good business environment to attract resources, such as capital and talent, which improves the potential of regional development and promotes high-quality economic development. In areas where the government’scom- prehensive governance capacity is strong, its resource allocation efficiency is high, which means that the motivation for government intervention in market activity is weak. High governance capacity is beneficial not only for promoting the development of the financial market and improve the level of financial agglomeration but also for increasing the degree of regional marketisation and giving full play to the role of the market in resource allocation, thus reducing the effectiveness of monetary policy (Wang, 2015). In addition, in regions with strong comprehensive governance capacity of the government, the fiscal transparency of the government is relatively high, and the information communication between market entities is adequate, which is conducive to easing the information asymmetry problem in the issuance of local government bonds, thereby reducing the issuance interest rate of local government bonds (Cuny, 2016;Diao, 2017; Zhou, 2018). Therefore, regions with strong governance capability have higher economic development quality, financial marketisation level and fiscal transparency; the risk premium of the local government bonds they issue is relatively low; and the impact of monetary policy is weak. In conclusion, this paper proposes the following hypotheses: Hypothesis 2a: With other conditions unchanged, the higher the degree of fiscal decen- tralisation is, the weaker the influence of monetary policy on the pricing of local govern- ment bond issuance. Hypothesis 2b: With other conditions unchanged, the higher the level of local govern- ment debt is, the stronger the influence of monetary policy on the pricing of local government bond issuance. Hypothesis 2c: With other conditions unchanged, the stronger the governance ability of local governments is, the weaker the influence of monetary policy on the pricing of local government bond issuance. 530 J. PAN, ET AL. 3. Sample and methodology 3.1. Sample description and data sources The local government bonds issued before 2015 are in the pilot stage, with a small issuance scale and a low level of information disclosure. Therefore, this paper selects local government bonds from 2015 to 2018 as research samples. Given that Tibet did not issue local government bonds in 2015 and the number and amount of subsequent issuance were small, the data of Tibet were excluded from the sample in this paper. Since this paper mainly studied the differences at the provincial level, it further excluded the five cities listed separately in the plan (Ningbo, Dalian, Shenzhen, Qingdao and Xiamen) as well as the bond samples of Xinjiang Production and Construction Corps, newly added in 2018. In addition, all continuous variables are winsorised at 1% and 99% to control the influence of outliers. Finally, 3842 observed values were obtained. In this paper, the data of local government bonds are from the Wind database. To ensure the accuracy and completeness of the data, this paper checks and supplements the data based on the relevant data of China’s Bond Information Network. The relevant data of monetary policy are from the website of the People’s Bank of China, and the relevant provincial data, such as economy, finance and debt, are from the CSMAR database and the Ministry of Finance website, supplemented and improved by data in local government bond information disclosure documents and local government bond credit rating reports. 3.2. Empirical models and variable definitions To explore how monetary policy affects the pricing of local government bond issuance, based on relevant studies (Ba et al., 2019; Liu et al., 2017; Wang and Fang, 2018), this paper sets a regression model (1) to test H1: X X Spread ¼ α þ α Policy þ Controls þ Province þ Year þ ε (1) 0 1 The dependent variable is Spread, which is measured by the difference between the local government bond issuance rate minus the average yield of government bonds with the same outstanding period 5 working days before the issue date. After the reduction of the interest rate of risk-free government bonds, the spread can better reflect the judgement of bond market participants on the risk premium of local government bonds in the face of monetary policy fluctuations. The explanatory variable is Policy, which is measured by the difference between M2 minus the growth rate of real GDP in the current year and the CPI in the current year (Yang & Yin, 2017). Referring to the existing research results, this paper selects the following control variables: (1) bond feature level: bond issuance size (Size); maturity of bonds (Maturity); category of bonds (Category); distribution of bonds (Distribution); underwriters (Underwriters). (2) Regional economic development: per capita gross regional product (PerGDP); investment ratio (IR); industrial structure (IS); regional total volume of imports and exports (Trade); loan balance (Loan). (3) Financial situation of local governments: transfer payment dependency (Transfer); degree of financial dependence on land (Land); CHINA JOURNAL OF ACCOUNTING STUDIES 531 Table 1. Definitions of variable. Variables Definition Spread The difference between local government bond issuance rates and risk-free government bond rates Policy M2 growth rate-GDP growth rate-CPI growth rate Size Log of 1 plus issuance of local government bonds Maturity Local government bond issuance term Category 1 if local government bonds are general bonds; and 0 otherwise Distribution 1 if local government bonds are for public offering; and 0 otherwise Underwriter The sum of main members, sub-underwriters and general members of the underwriting syndicate PerGDP Log of GDP per capita IR Ratio of lagged investment in fixed assets to regional GDP IS Ratio of local tertiary industry output value to regional GDP Trade Ratio of loans of provincial financial institutions to regional GDP Loan Ratio of loans of provincial financial institutions to regional GDP Transfer Ratio of central transfer payments and tax rebates to comprehensive financial resources Land Ratio of local fiscal fund income to comprehensive financial resources FT China’s Provincial Fiscal Transparency in the China Fiscal Transparency Report FD Ratio of local fiscal revenue per capita to central fiscal revenue per capita Debt_Ratio Ratio of local government debt balance to local government’s comprehensive financial resources GGI The sum of normalised four dimensions of government efficiency, marketisation, fairness and integrity financial transparency (FT). In addition, this paper controls province fixed effects and year fixed effects. Further, to test the moderating effect of the difference between issuing agencies, based on model (1), this paper introduces DIG and Policy DIG and constructs a regression model (2) to test H2a, H2b and H2c: X X Spread ¼ α þ α Policyþ α DIGþ α Policy DIG þ Controlsþ Province þ Yearþε 0 1 2 3 (2) In this paper, FD, Debt_Ratio and GGI are used to measure DIG. FD is measured by the ratio of per capita local fiscal expenditure to per capita central fiscal expenditure. Debt_Ratio is measured by the ratio of local government debt balance to local govern- ment comprehensive financial resources. Following Qi et al. (2019), we define GGI as the sum of normalised government efficiency (the ratio of local GDP and regional financial expenditure), degree of marketisation (the marketisation index points of the Chinese provinces report of marketisation index), justice (rural per capita disposable income and the ratio of urban per capita disposable income) and the degree of corruption (the number of duty crimes per 10 civil servants). In Table 1, we provide a brief description of the main variables used in this paper. 4. Empirical results 4.1. Descriptive statistics As shown in Table 2, the minimum spread is −0.04%, the maximum is 0.86%, and the average is 0.322%. The minimum policy is −0.6%, the maximum is 5%, and the average is 1.7%, indicating that there are certain differences in monetary policies in different years. 532 J. PAN, ET AL. Table 2. Descriptive statistics. Variables Obs. Maximum Mean Minimum Std 25th quantile Meadian 75th quantile Spread 3842 0.860 0.322 −0.040 0.189 0.180 0.370 0.460 Policy 3842 5.000 1.700 −0.600 2.250 −0.300 2.600 2.600 Size 3842 5.420 3.310 0.582 1.140 2.490 3.430 4.190 Maturity 3842 30.000 6.210 1.000 2.530 5.000 5.000 7.000 Category 3842 1.000 0.492 0.000 0.500 0.000 0.000 1.000 Distribution 3842 1.000 0.714 0.000 0.452 0.000 1.000 1.000 Underwriter 3842 63.000 27.700 13.000 11.300 19.000 23.000 36.000 PerGDP 3842 11.900 10.900 10.200 0.383 10.600 10.800 11.200 IR 3842 1.360 0.800 0.221 0.241 0.675 0.844 0.958 IS 3842 0.810 0.488 0.388 0.075 0.444 0.468 0.519 Trade 3842 1.120 0.242 0.032 0.238 0.090 0.132 0.301 Loan 3842 2.540 1.440 0.838 0.378 1.200 1.340 1.620 Transfer 3842 0.775 0.368 0.052 0.188 0.205 0.387 0.517 Land 3842 0.534 0.213 0.051 0.098 0.129 0.214 0.281 FT 3842 70.000 44.900 19.400 13.800 34.400 44.600 55.400 FD 3842 4.190 1.080 0.471 0.760 0.654 0.831 1.150 Debt_Ratio 3842 1.950 0.885 0.410 0.308 0.668 0.804 1.020 GGI 3842 2.800 1.970 1.610 0.189 1.830 1.970 2.070 4.2. Basic regression results 4.2.1. Monetary policy and the pricing of local government bonds Table 3 shows the monetary policy’s impacts on the pricing of local government bonds. This article first controls the bond characteristics of local government bonds, such as their issuance methods, scale, and maturity for regression analysis, then further adds regional economic, fiscal and other control variables for regression analysis, and finally adds province fixed effects and year fixed effects. It can be seen from the regression results that the coefficients of the policy variables are −0.032, −0.024 and −0.049, respectively, which are all significant at the level of 1%. This verifies hypothesis H1 in this paper that the looser the monetary policy is, the lower the spread of local government bonds will be. 4.2.2. The moderating effect of the differences among issuing agencies Column (1) in Table 4 is the empirical result of the regulatory effect of fiscal decentralisa- tion. After adding FD and Policy*FD, the regression coefficient of Policy is −0.056, which is significant at the 1% level. The regression coefficient of Policy*FD is 0.006, which is significant at the 1% level, indicating that a higher degree of fiscal decentralisation can moderate the negative influences of monetary policy on the pricing of local government bonds. Hypothesis H2a is supported. Column (2) in Table 4 is the empirical result of the debt risk regulatory effect. After the addition of Debt_Ratio and iPolicy * Debt_Ratio, the regression coefficient of Policy is −0.040 and is significant at the 1% level. The regression coefficient of Policy∗Debt_Ratio is −0.011, which is significant at the level of 1%, indicating that higher local debt risks enhance the negative impacts of monetary policy on the spread of local government bond issuance. Hypothesis H2b is supported. Column (3) in Table 4 is the empirical result of the regulatory effect of government governance. The regression coefficient of Policy is −0.088 and significant at the 1% level after the addition of GGI and Policy*GGI. The regression coefficient of Policy∗GGI is 0.020, which is significant at the level of 1%, indicating that the stronger the local government’s comprehensive governance ability is, the more it can weaken the negative impacts of CHINA JOURNAL OF ACCOUNTING STUDIES 533 Table 3. Monetary policy and pricing of local government bonds. Variables Spread Spread Spread Policy −0.032*** −0.024*** −0.049*** (−25.20) (−14.95) (−10.24) Size −0.011*** −0.006*** 0.000 (−5.24) (−2.85) (0.12) Maturity 0.008*** 0.007*** 0.007*** (9.08) (9.02) (9.88) Category 0.015*** 0.023*** 0.024*** (3.26) (5.08) (5.81) Distribution −0.239*** −0.243*** −0.245*** (−47.93) (−50.77) (−55.48) Underwriter 0.002*** 0.003*** −0.001*** (8.84) (11.73) (−3.15) PerGDP 0.087*** −0.073 (8.30) (−0.94) IR −0.023 0.106*** (−1.21) (4.29) IS 0.018 0.327* (0.33) (1.87) Trade −0.119*** 0.171** (−5.60) (2.05) Loan −0.023** 0.026 (−2.36) (0.83) Transfer 0.290*** −0.947*** (6.81) (−4.46) Land 0.155*** −0.538*** (3.09) (−5.49) FT 0.001*** −0.000 (3.43) (−0.82) 1.043 Constant 0.465*** −0.636*** (37.11) (−4.82) (0.99) Province YES Year YES Observations 3,842 3,842 3,842 Adjusted R-squared 0.489 0.533 0.618 ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively. Heteroscedasticity-robust t-statistics are displayed in parentheses. The same as in the following Tables. monetary policy on the pricing of local government bond issuance. Hypothesis H2c is also supported. 5. Additional analysis Loose monetary policy leads to a decline in the interest rate and a relatively abundant supply of credit resources, which is conducive to the issuance of local government bonds. The reduction of the market interest rate also reduces the cost of capital used by commercial banks, and their expected yield on local government bonds will decline. Moreover, loose monetary policy can boost the economy, stimulate consumption and investment, and may increase local government revenue. In the meantime, loose mone- tary policy leads to a decline in the market interest rate, which will be conducive to reducing the debt burden of local governments, thus balancing the fiscal revenue and expenditure of local governments and reducing the risk premium of local government bond issuance. Therefore, this paper examines the intermediary mechanism by which 534 J. PAN, ET AL. Table 4. Moderating effect of differences among issue agencies. (1) (2) (3) Spread Spread Spread Policy −0.056*** −0.040*** −0.088*** (−11.35) (−6.82) (−7.99) FD −0.111*** −0.081** −0.116*** (−3.52) (−2.36) (−3.70) Policy*FD 0.006*** (4.47) Debt_Ratio 0.074*** 0.141*** 0.087*** (3.29) (4.06) (3.75) Policy*Debt_Ratio −0.011*** (−2.87) GGI 0.008 0.010 0.012 (0.31) (0.37) (0.46) Policy*GGI 0.020*** (3.82) Size −0.000 −0.000 0.000 (−0.15) (−0.08) (0.08) Maturity 0.008*** 0.008*** 0.008*** (10.07) (10.04) (10.03) Category 0.023*** 0.023*** 0.023*** (5.68) (5.76) (5.80) Distribution −0.244*** −0.245*** −0.245*** (−55.54) (−55.69) (−55.77) Underwriter −0.001*** −0.001*** −0.001*** (−3.70) (−3.20) (−3.57) PerGDP −0.033 −0.044 −0.030 (−0.42) (−0.57) (−0.38) Ir 0.067*** 0.073*** 0.073*** (2.67) (2.91) (2.91) Is 0.344** 0.337* 0.461*** (1.99) (1.94) (2.63) Trade 0.077 0.152* 0.110 (0.90) (1.82) (1.29) Loan 0.004 0.024 0.024 (0.13) (0.74) (0.73) Transfer −1.166*** −1.653*** −1.459*** (−4.38) (−6.70) (−5.83) Land −0.587*** −0.656*** −0.603*** (−4.94) (−5.59) (−5.05) Ft −0.000 −0.000 −0.000* (−1.42) (−1.44) (−1.83) Constant 1.109 1.026 0.964 (1.05) (0.96) (0.91) Province YES YES YES Year YES YES YES Observations 3,842 3,842 3,842 Adjusted R-squared 0.625 0.624 0.624 monetary policy affects the pricing of local government bonds from two aspects: the supply of market funds and the financial situation of the local government. On the one hand, this paper uses the overnight SHIBOR (Shanghai Interbank Offered Rate) to reflect the market capital supply at the time of the issuance of local government bonds and explores whether there is a certain intermediary effect on the relationship between monetary policy and the pricing of local government bonds. The higher the interbank offered rate (SHIBOR) is, the worse the supply of credit funds in the market, and the higher the cost for investors to use the funds. The empirical results are shown in columns (1) – (3) in Table 5. Column (1) shows the impact of Policy on Spread, and the results are CHINA JOURNAL OF ACCOUNTING STUDIES 535 Table 5. Mediation effect test. Supply of market funds Financial situation (1) (2) (3) (4) (5) (6) Spread Shibor Spread Spread FSR Spread Policy −0.047*** −0.148*** −0.034*** −0.036*** 0.002*** −0.034*** (−9.90) (−18.86) (−7.00) (−7.27) (3.38) (−7.00) Shibor 0.085*** 0.086*** −0.002* 0.085*** (8.74) (8.86) (−1.79) (8.74) FSR −0.746*** −0.411** −0.711*** −0.711*** (−5.40) (−1.97) (−5.19) (−5.19) Size 0.000 −0.011*** 0.001 0.001 0.000* 0.001 (−0.03) (−3.53) (0.46) (0.62) (−1.83) (0.46) Maturity 0.007*** 0.000 0.007*** 0.007*** 0.000 0.007*** (9.96) (0.09) (10.05) (9.97) (0.55) (10.05) Category 0.024*** 0.018*** 0.022*** 0.022*** 0.000 0.022*** (5.84) (2.69) (5.51) (5.47) (0.25) (5.51) Distribution −0.245*** −0.013* −0.244*** −0.244*** 0.000 −0.244*** (−55.60) (−1.85) (−55.86) (−55.75) (0.88) (−55.86) Underwriter −0.001*** 0.001 −0.001*** −0.001*** 0.000** −0.001*** (−3.38) (1.47) (−3.62) (−3.40) (−2.48) (−3.62) PerGDP −0.101 0.003 −0.102 −0.075 −0.037*** −0.102 (−1.30) (0.02) (−1.31) (−0.97) (−4.10) (−1.31) IR 0.056** 0.032 0.053** 0.101*** −0.067*** 0.053** (−2.13) (0.74) (2.05) (4.12) (−23.14) (2.05) IS 0.343** −0.236 0.363** 0.348** 0.021 0.363** (1.97) (−0.82) (2.11) (2.01) (1.04) (2.11) Trade 0.121 0.042 0.118 0.165** −0.066*** 0.118 (1.45) (0.31) (1.42) (2.00) (−6.82) (1.42) Loan 0.009 −0.033 0.012 0.028 −0.024*** 0.012 (0.28) (−0.63) (0.37) (0.90) (−6.33) (0.37) Transfer −1.619*** −1.576*** −1.486*** −0.843*** −0.904*** −1.486*** (−6.59) (−3.87) (−6.09) (−4.00) (−36.30) (−6.09) Land −0.716*** −0.944*** −0.636*** −0.465*** −0.241*** −0.636*** (−6.95) (−5.53) (−6.21) (−4.77) (−20.91) (−6.21) FT −0.000 −0.000 −0.000 0.000 0.000*** 0.000 (−1.34) (−0.35) (−1.30) (−0.80) (−5.99) (−1.30) Constant 2.211** 3.326* 1.936** 0.820 1.571*** 1.936* (2.06) (1.82) (1.82) (0.79) (12.75) (1.82) Province YES YES YES YES YES YES Year YES YES YES YES YES YES Observations 3,842 3,842 3,842 3,842 3,842 3,842 Adjusted R-squared 0.62 0.81 0.63 0.63 0.99 0.63 Sobel test −0.013*** (z = −7.93) −0.001*** (z = −2.83) Goodman test1 −0.013*** (z = −7.92) −0.001*** (z = −2.79) Goodman test2 −0.013*** (z = −7.94) −0.001*** (z = −2.87) Proportion of Mediation effect 0.267 0.039 consistent with the results of the main regression test. Column (2) examines the impact of Policy on SHIBOR. The results show that at a significance level of 1%, the impact coefficient of Policy on SHIBOR is −0.148, indicating that loose monetary policy can reduce the market interest rate and increase the supply of credit funds in the market. Column (3) is the final test of the intermediary effect. The empirical results show that monetary policy can affect market interest rates and the supply of credit resources and ultimately affect the spread of local government bonds. That is, the SHIBOR has a partial intermediary effect between Policy and Spread. The proportion of the intermediary effect in the total effect is approximately 26.7%. On the other hand, this paper uses the degree of fiscal self-financing (FSR) to study whether there is a certain mediating effect between monetary policy and the pricing of local government bonds. A higher FSR indicates that the more balanced fiscal revenue 536 J. PAN, ET AL. and expenditure of the local government are, the better the financial situation is. The empirical results are shown in columns (4) – (6) in Table 5. Column (4) shows the impact of Policy on Spread, and the results are consistent with the results of the main regression test. Column (5) examines the impact of Policy on FSR. The results show that at the significance level of 1%, the impact coefficient of Policy on FSR is 0.002, which indicates that loose monetary policy is helpful to balance the fiscal revenue and expenditure of local governments and improve their fiscal situation. Column (6) is the final test of the intermediary effect. The empirical results show that monetary policy can reduce the spread of local government bonds by affecting the fiscal situation of local governments. FSR has a partial intermediary effect in the process of Policy affecting Spread, and the proportion of the mediating effect in total effect is approximately 3.9%. In this paper, Sobel, Goodman1 and Goodman2 tests were performed on the above mediating effects, and all were significant at the 1% level. 6. Robustness tests To ensure the reliability of the research conclusion, we adopt several methods for robustness tests. (1) We replace the explanatory variable with the quarterly data of M2- GDP-CPI (Policy_Quarter). (2) With reference to Romer and Romer (1990), Rao and Jiang (2013), we use the annual M2-GDP-CPI measured by the difference of the tightness of monetary policy. In addition, combined with changes in the rate of deposit reserves to the comprehensive judgement of monetary policy, based on the above ideas, we define 2015 and 2016 as the period of loose monetary policy and 2017 and 2018 as the period of monetary policy tightening (Policy_Dummy: equals 1 if monetary policy is loose, and 0 otherwise). (3) We also collected the bankers’ questionnaire survey reports issued by the People’s Bank of China and the National Bureau of Statistics and replaced the explanatory variable with the monetary policy experience index (Confidence). The monetary policy perception index represents the proportion of bankers who judge monetary policy to be appropriate as a percentage of the total number of bankers surveyed. A higher value represents a looser monetary policy. The specific results are shown in Table 6. 7. Conclusions and future research Based on a sample of local government bonds from 2015 to 2018, this paper studies the impact of monetary policy on the pricing of local government bonds. We found that loose monetary policy can reduce the spread of local government bonds. The higher the degree of fiscal decentralisation and the stronger the ability of government governance are, the weaker the influence of monetary policy on the spread of local government bonds is; in contrast, the higher the risk of local government debt is, the stronger the influence of monetary policy on the spread of local government bonds. The mediating effect test shows that loose monetary policy can reduce the spread of local government bonds by increasing the supply of market credit resources and improving the fiscal situation of local governments. The conclusions of this paper could provide not only empirical evidence on the relationship between monetary policy and the pricing of local government bonds but also insights for improving government governance capabilities and preventing local government debt risks. CHINA JOURNAL OF ACCOUNTING STUDIES 537 Table 6. Robustness tests. Spread Spread Spread Policy_Quarter −0.036*** (−17.25) Policy_Dummy −0.164*** (−24.20) Confidence −0.007*** (−17.65) Size −0.004** −0.001 −0.002 (−2.21) (−0.63) (−1.23) Maturity 0.007*** 0.008*** 0.008*** (8.94) (9.80) (9.43) Category 0.024*** 0.023*** 0.024*** (5.54) (5.35) (5.43) Distribution −0.250*** −0.246*** −0.242*** (−52.23) (−53.59) (−51.17) Underwriter 0.002*** 0.002*** 0.003*** (6.75) (6.50) (15.02) PerGDP 0.072*** 0.073*** 0.099*** (6.82) (7.33) (9.84) IR −0.008 −0.008 −0.022 (−0.42) (−0.45) (−1.12) IS 0.014 −0.031 0.005 (0.25) (−0.59) (0.09) Trade −0.111*** −0.115*** −0.133*** (−5.26) (−5.68) (−6.35) Loan −0.028*** −0.029*** −0.017* (−3.15) (−1.73) (−2.93) Transfer 0.209*** 0.150*** 0.295*** (4.83) (3.64) (7.13) Land 0.070 −0.042 0.131*** (1.38) (−0.87) (2.65) FT 0.000** 0.000* 0.001*** (2.35) (1.87) (4.95) Constant −0.352*** −0.280** −0.509*** (−2.61) (−2.27) (−3.93) Province YES YES YES Year YES YES YES Observations 3,842 3,842 3,842 Adjusted R-squared 0.541 0.571 0.543 The spread of issuance of local government bonds reflects the credit risk premium of local governments. Although local governments need to reduce the cost of bond issuance to save financial funds, for the benign development of the local government bond market, they cannot unilaterally pursue the cost reduction of bond issuance through government intervention in the allocation of credit resources. Local governments can balance their fiscal revenues and expenditures and issue local government bonds through favourable macroeconomic policies. Moreover, local debt risks can be prevented by improving government governance capabilities, regional marketisation and the vitality of economic development. From the perspective of the national level, monetary policy regulation can be targeted to different regions to improve the effectiveness of macro policies. Moreover, we need to further promote the reform of the financial system, improve relevant laws and regulations, and make the pricing of local government bonds more market oriented. 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China Journal of Accounting Studies – Taylor & Francis
Published: Oct 2, 2019
Keywords: Monetary policy; local government bonds; differences among issuing agencies; bond pricing
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