Andrew Ang, Jennie Bai, and Hao Zhou, 2016. The Great Wall of Debt: Corruption, Real Estate, and Chinese Local Government Debt. Working paper.

Abstract:

Chengtou bonds-urban construction and investment bonds, backed mostly by land sales, are the major financing source for Chinese local governments. We and that one standard deviation increase in local real estate GDP-the growth engine in economy-corresponds to about 8.6 percent decrease in Chengtou bond excess yields. Political risk, a novel measure based on the anti-corruption campaign in China, has a significant negative effect on Chengtou bond prices. However, conditional on high corruption level, real estate GDP actually elevates Chengtou bond yields; only low corruption provinces enjoy the low financing costs due to high real estate GDP.