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(Source: Department of Public Finance of School of Economics) The paper “The Risk Governance Effect of Creditors’ Credit Constraints from the Perspective of Signal Transmission”, co-authored by Professor Guo Yuqing and doctoral student Jiang Xiaoni from our school, Professor Mao Jie from University of International Business and Economics and Professor Wang Hao from Central University of Finance and Economics, was published in The Journal of World Economy, 9th issue of 2022.

In response to the risk impact of generalised off-balance sheet debt stemming from local financing platforms, a consensus has been developed at the academic and policy level to adhere to the bottom-line mindset to avoid financialization of fiscal risk. Based on the policy formulated by the China Banking Regulatory Commission (CBRC) that restricts creditors’lending by setting cash-flow coverage threshold conditions, this paper constructs a signalling game model to explain the theoretical logic of risk governance from the price reduction perspective, and subsequently uses the fuzzy regression discontinuity design (FRDD) to provide empirical evidence on the signalling transmission mechanism. The findings indicate that creditors’credit constraints affect market decision-making through risk signals issued by the credit scale of financial institutions. At the threshold point of the“full cash flow coverage”policy, the risk premium of urban investment bonds (UIBs) is restored, which promotes the market-oriented pricing mechanism for debt risks. To curb the spillover from debt risk to financial risk during the transition period, this paper provides policy suggestions to improve the price discovery function, promote debt information disclosure and reduce implicit contractual intervention.

Founded in 1978 and sponsored by China Society of World Economics and Institute of World Economics and Politics Chinese Academy of Social Sciences, The Journal of World Economy is one of China’s earliest journals of world economy. It is recognized as a top journal of economics by universities and research institutions in China.