Bond Guarantee Decisions from the Perspective of Local Government Financing Vehicles

Bond guarantees are an important means of replacing implicit guarantees and mitigating the debt risks of local government financing vehicles. However, owing to factors such as "ratings packaging," some guaranteed issuers are of relatively low quality ex ante. This paper analyzes the factors underlying guarantee decisions when local government financing vehicles issue bonds. The findings show that such vehicles are more inclined to issue guaranteed bonds when they have weaker government ties, lower-quality collateral, and poorer operating capacity. The policy abolishing mandatory ratings for bond issuance curbed the false guarantees arising from "ratings packaging." This paper offers policy recommendations for improving bond guarantee services, promoting the market-oriented transformation of urban investment bonds, and proactively preventing and resolving the debt risks of local government financing vehicles.