Pricing Effects of Natural Resource : Evidence from Municipal Corporate Bonds in China

Natural resources are important assets in a region, and resource depletion may lead to the disappearance of local collateral, which may be priced by the capital market. This paper investigates the impact of resource depletion on the spread of municipal corporate bonds using data from the lists of “resource-exhausted” cities published by the central government in China. We employ a difference-in-differences framework to estimate the causal effects of the treatment cities being resource-exhausted. Our results indicate that the treatment cities experience significant deterioration in the average spread of municipal corporate bonds. To understand the underlying mechanisms, we conduct analyses that reveal the extensive negative effects of resource depletion on local governments’ fiscal conditions, the solvency of LGFVs, and urban transformation costs. These findings provide empirical evidence to support the pricing effects of natural resources and shed light on the microscopic mechanisms by which resource depletion affects local economic development