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Price Discovery and Market Segmentation in China's Credit Market

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  • Zhe Geng
  • Jun Pan

Abstract

We study the extent of price discovery in the onshore Chinese corporate bond market, focusing in particular on the information content of credit spreads in China. Using Merton's model of default, we construct credit measures of publicly listed firms, using information from their financial statements and stock valuation. We find that, only after the first default in 2014, do credit spreads in China become informative. Compared with the findings in the US credit market, the magnitude of price discovery in the Chinese market is rather limited. We also find that the presence of outside government support for state-owned enterprises (SOEs) in China results in a market segmentation between SOE and non-SOE issuers that is harmful to price efficiency and market stability. Since 2018, the non-SOE issuers have suffered from explosive credit spreads, unprecedented defaults, and shrinking new issuance, while the SOE issuers have remained largely intact. Meanwhile, our default measures show that the non-SOE issuers are in fact stronger in credit quality than their SOE counterparts of the same rating category. Examining the impact of this segmentation on price discovery, we find that non-SOE credit spreads become significantly more informative since 2018, as concerns over credit become front and center for the non-SOE issuers. By contrast, as investors seek safety in SOE bonds, there is no improvement in the information content of SOE credit spreads.

Suggested Citation

  • Zhe Geng & Jun Pan, 2019. "Price Discovery and Market Segmentation in China's Credit Market," NBER Working Papers 26575, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26575
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    References listed on IDEAS

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    1. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. Jack Bao & Jun Pan & Jiang Wang, 2011. "The Illiquidity of Corporate Bonds," Journal of Finance, American Finance Association, vol. 66(3), pages 911-946, June.
    4. Pierre Collin-Dufresn & Robert S. Goldstein & J. Spencer Martin, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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