Fiscal capacity, debt space, and LGFV bond spreads in China

We examine whether China’s LGFV bond market prices two province-level attributes surrounding implicit public support: fiscal capacity and measured bond-market debt space. The analysis matches 21,247 issuances observed through 28 June 2024 to prior-year information and estimates separate principal components from a balanced panel of 682 province-year observations. One balanced-panel standard deviation of stronger fiscal capacity is associated with 57.4 basis points lower issuance spreads. Measured debt space is also negatively associated with spreads in the main and equal-cell models and is supported by main wild-cluster inference, but its coefficient approaches zero when the four provincial-level municipalities are excluded. In the equal-transaction bond-level model, the 2020–2024 capacity-slope change is more negative than the debt-space change; their difference is −0.416 (wild-cluster p=0.038). The difference is negative across 25 systematically defined checks, although precision varies and the equal-cell model does not reject equality. Fiscal capacity also remains negatively priced within AA and AA+ bonds. The paper’s contribution is to separate these two measured states, revealing robust capacity pricing alongside a weaker, specification-sensitive debt-space gradient. These are conditional province-level pricing gradients, not sponsor-specific or causal bailout effects.