Implicit Government Guarantee and Corporate Investment: Evidence from China’s Belt and Road Initiative

ABSTRACT

Implicit government guarantee results in financing convenience and distorting corporate investment. The effects on MCB’s credit spread and corporate investment are studied in this paper based on China’s bond market from 2010 to 2020. The implicit government guarantee lies in MCBs whose financing costs are significantly lower than those of POEs. The inefficiency of corporate investment also exists in MCBs with investment reductions. But this inefficiency has been corrected by China’s recent major national strategy, the Belt and Road Initiative. We provide direct evidence from three perspectives, provinces along BRI routes, city-level features of China-Europe Railway Express and bond-level funding purposes. This paper reveals that implicit government guarantee could only reduce the funding cost, while major national strategy is helpful to promote corporate investment.

KEYWORDS:

• Implicit government guarantee
• credit spread
• corporate investment
• belt and road initiative

Acknowledgments

Xiaoqian Zhang acknowledges the support of National Social Science Foundation of China (No. 21BJY015) and National Natural Science Foundation of China (No. 71472167). This article was presented at the 3rd Young Management Scholars Forum, China Finance Academic and Policy Forum, the 3rd China Development Economics Scholars Forum, and the 20th China Economics Annual Conference, Local Debt Risk Prevention and High-quality Economic Growth Forum, the 3rd High-end Frontier Forum of Applied Economics, the 2nd International Annual Conference of “China Development Theory,” the 19th China Young Economist Forum, the 2nd “One Belt One Road” Financial Cooperation Economic Effects Academic Seminar. We also acknowledge the discussion from Jianye Yan, Haoyu Gao, Nan Hu, Hongru Xiong, Yifei Li, Yi Yan, Zhengwen Wang, Long Zhang, Qi Zhou, Guofeng Zhang, Qian Xie, Yang Yao, Shujie Yao, Zhuo Chen, Pranab Bardhan and others.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the National Social Science Fund [21BJY015] and National Natural Science Foundation of China [71472167].