Fear of war: Geopolitical risks and the potential impact on local government bonds, stock market and FDI in China

Abstract

This study investigates the impact of Taiwan Strait-related geopolitical risk on local government bonds, stock market and FDI in the Chinese mainland. Using data from 10,983 bonds, we find that increased geopolitical risks are associated with higher credit spreads. Provinces with higher FDI and greater foreign trade dependence, short-term bonds, and secondary market trading are more strongly affected. A case study demonstrates that geopolitical risk has an immediate and persistent impact on spreads, peaking within one month and gradually declining afterward. Moreover, heightened geopolitical risk negatively affects provincial FDI inflows and the stock returns of state-owned enterprises.