The gradual no bailout reform in the Chinese corporate bond market : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

Abstract

China’s corporate bond market has long been shaped by implicit government guarantees, leading to distorted risk pricing, weakened market discipline and inefficiencies in capital allocation. In response, financial reforms have been introduced to enhance market-oriented mechanisms and reduce the reliance on state intervention. This study investigates the necessity, impact and effectiveness of these reforms through a comprehensive three-part analysis. First, this study evaluates the necessity for and expected impact of financial market reforms using a Dynamic Stochastic General Equilibrium (DSGE) model, followed by empirical validation through the Propensity Score Matching-Difference-in-Differences (PSM-DID) approach. The DSGE model suggests that reducing government support for state-owned enterprises (SOEs) would enhance risk pricing and improve market efficiency, albeit with short-term disruption. Empirical results confirm that, after the reform, SOEs' financing advantage would decline, and their credit rating premium weaken. However, credit rating agencies continue to exhibit limited differentiation in assessing SOEs' risk, indicating a lack of due diligence. Second, using a bidirectional market discipline framework, this study analyses the monitoring and influencing effects of the bond market reforms. The findings reveal that market discipline has significantly improved, reflecting a stronger risk-pricing mechanism. However, the persistence of the "too big to fail" phenomenon suggests that large SOEs still benefit from perceived government support despite the regulatory tightening. Third, the study examines the role of credit risk mitigation warrants (CRMW) in addressing POEs’ financing constraints. The results indicate that these instruments have effectively expanded financing channels for non-SOEs, demonstrating their potential as a market-driven solution to mitigate financial imbalances. This study provides empirical evidence and policy recommendations for China's financial authorities and offers insights into the effectiveness of market-oriented reforms and the challenges in strengthening credit market discipline. These findings contribute to broader discussions on state intervention, financial liberalisation and transition economies.