Chinese Local Bond Spreads, Monetary Policy and 'Misallocation'

We examine the impact of Chinese monetary policies on the excess bond yields of Chinese local bonds issued by Chinese local government entities. We find that an expansion in M2 generally raises the excess yields of the bonds of Chinese local government entities, and the impact is amplified for local bonds issued by local governments that are characterized as having a high degree of existing resource misallocation. Our estimation results confirm that local government bond excess yields can be used as an indicator of the riskiness of Chinese local government debt.