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Bonded to the State: A Network Perspective on China's Corporate Debt Market

Author

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  • Li-Wen Lin
  • Curtis J. Milhaupt

Abstract

A corporate bond market has the potential to play an important role as a supplement to bank-oriented financial systems in emerging markets—functioning in effect as a ‘spare tire’. Yet bond markets typically rely upon formal institutions that are lacking in developing economies. Despite significant institutional weaknesses, China’s corporate bond market has grown to become the third largest in the world. In this article, we use a network perspective to explore the formation, operation, and function of the Chinese corporate bond market. We explain the market’s exponential growth as a result of a network of relationships among state-owned or linked actors that has substituted for formal institutions. But the consequences of this state-centric network may undermine the spare tire function. We begin by unpacking the complexities of the market’s structure and formal regulation, which have been shaped by a surprising degree of regulatory competition. Next, we analyse China’s corporate bond market as a network of relationships that invariably lead back to the state, and explore the consequences of this network on the pricing, rating, and default of corporate bonds. The paper concludes by highlighting several important policy issues raised by our analysis, including the consequences of regulatory competition, the potential role of the bankruptcy system in handling issuer financial distress, and the linkages between the corporate bond market and China’s rapidly expanding shadow banking system. The size, and institutional fragility, of the Chinese corporate bond market illustrate both the accomplishments and limitations of state capitalism.

Suggested Citation

  • Li-Wen Lin & Curtis J. Milhaupt, 2017. "Bonded to the State: A Network Perspective on China's Corporate Debt Market," Journal of Financial Regulation, Oxford University Press, vol. 3(1), pages 1-39.
  • Handle: RePEc:oup:refreg:v:3:y:2017:i:1:p:1-39.
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    File URL: http://hdl.handle.net/10.1093/jfr/fjw016
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    Citations

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    Cited by:

    1. Anderson, Ronald W., 2020. "Who bears risk in China's non-financial enterprise debt?," LSE Research Online Documents on Economics 118879, London School of Economics and Political Science, LSE Library.
    2. Yinghui Chen & Lunan Jiang, 2021. "Liquidity risk and corporate bond yield spread: Evidence from China," International Review of Finance, International Review of Finance Ltd., vol. 21(4), pages 1117-1151, December.
    3. Cai, Yue, 2021. "Expansionary monetary policy and credit allocation: Evidence from China," China Economic Review, Elsevier, vol. 66(C).
    4. Yinghui Chen & Lunan Jiang, 2019. "Liquidity Risk and Corporate Bond Yield Spread: Evidence from China," CFDS Discussion Paper Series 2019/9, Center for Financial Development and Stability at Henan University, Kaifeng, Henan, China.
    5. Huang, Xiaoyong & Yu, Cong & Chen, Yunping & Jia, Fei & Xu, Xiangyun, 2022. "Rigid payment breaking, default spread and yields of Chinese treasury bonds," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    6. Han, Xuehui & Epetia, Ma. Christina F. & Cheng, Yuan, 2021. "“Subsidies” or “taxes”? Corporate credit misallocation induced by the nexus of state-owned enterprises and state-owned banks," Journal of Asian Economics, Elsevier, vol. 76(C).
    7. Long Wu & Lei Xu, 2020. "Venture capital certification of small and medium‐sized enterprises towards banks: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(2), pages 1601-1633, June.
    8. Mo, Guiqing & Gao, Zhi & Zhou, Lei, 2021. "China's no-bailout reform: Impact on bond yields and rating standards," Journal of Banking & Finance, Elsevier, vol. 133(C).
    9. Deng, Kaihua & Qiao, Guannan, 2022. "Triple A default," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).

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