Not All Bonds Are Created Equal - As Benchmarks for Corporate Bonds

We find among government and quasi-government bonds, municipal corporate bonds (MCB) act as regional benchmarks and improve the quality of the nascent but fast-growing corporate bond market in China by facilitating price discovery and expanding investment opportunity sets. The benchmark effects of MCBs are more pronounced in corporate bonds with similar maturity, from the same region, in industries directly affected by government spending or traded on the exchange market. Furthermore, we find the supply of long-term MCBs encourages local corporations to issue long term bonds, indicating the possibility of complementarity between government and corporate bonds when bond market quality is poor.