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Profs Jennifer Carpenter and Robert Whitelaw explain the advantages of local Chinese government bonds

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Excerpt from International Finance News -- "First, giving local governments more authority and liability for their bond issuances strengthens their incentives to leverage their local knowledge about which projects have the best potential. Second, because the borrowing is directly from markets, local governments will pay a more market-based cost of capital, which aggregates information across a diffuse investor base and helps to allocate capital toward better uses. Third, creating a tradable standardized set of bonds will help create liquidity and attract capital. It will also increase transparency about the use of the capital, as observable yield spreads will contain clear signals about the market’s assessment of default risk, although this will reflect both asset risk and political risk."

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