Journal of Applied Finance & Banking

Analysis of the Pro-cyclical Behavior of Credit Spread in Chinese Bond Market

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  • Abstract


    This paper studies the relationship between credit spread and economic cycle in China. Using secondary market transaction data in the Chinese inter-bank bond market, paper finds that credit spread behaves pro-cyclically with economy growth, which is counter to asset pricing theory and empirical findings from developed bond markets. This relationship illustrates that pricing efficiency in Chinese bond market is very low. Further, paper finds that firm type (SOE or non-SOE) is a very important determinant of credit spread. SOE bond spread and non-SOE bond spread behave differently after bond default occurs in Chinese market. Behind the difference between SOE bond and non-SOE bond is whether firm can get outside government support. Though bond pricing efficiency is low, the efficiency is improving after bond default occurs, indicating that Chinese bond market becomes mature gradually.


    Keywords: Credit Spread, Economic Cycle, SOE, Pricing Efficiency