China’s No-bailout Reform: Impact on Bond Yields and Rating Standards

Abstract

Chinese government broke its long-standing practice of bond bailouts in March 2014. The number and par value of bond defaults increased substantially in the following years. We investigate the Chinese bond defaults from 2014 to 2019 and examine the impact of the no-bailout reform. We find significantly higher yield spreads on lower-rated bonds over AAA bonds after the policy change. Further, we document much lower default rates for SOE bonds than non-SOE bonds and an increased funding advantage of SOEs after March 2014. Surprisingly, credit rating agencies loosened rating standards in response to the policy change, suggesting their caving in to demand for higher ratings.