Adaptable state-controlled market actors: Underwriters and investors in the market of local government bonds in China

Local government bonds (LGBs) have become the most important tool of the Chinese state for financing infrastructure projects. The underwriters and investors in LGBs are mostly commercial banks, with state actors holding the overwhelming majority of shares. We call these state-controlled market actors. This article investigates the role of state-controlled market actors in LGB issuance to extend the understanding of state actors and state–market relations in the financialisation of urban governance. The findings show that they underwrite and invest in LGBs to support the government's development objectives and make profits. They can hardly affect the government to create the terms and conditions of bonds to favour their financial interests, but they manage to make substantial profits. They follow the policy trends to identify LGBs as risk-free and reflexively change their investment priority towards the bonds. Due to the low interest rates, the banks mainly profit from bond trading in the secondary market and fiscal fund investment. There are preferential policies for LGB trading in the secondary market, and local governments deposit fiscal funds in the banks to motivate them to do LGB business. We argue that reflexively making investment decisions according to the policy environment and making profits by exploiting political resources represented by preferential policies and fiscal funds show the adaptability of the state-controlled market actors.