Policy signals, credibility and market expectations: Evidence from the Chinese bond market

Based on Chinese bond market transaction data, we study the effects of the Chinese Zeroing Hidden Debt (ZHD) policy on non-pilot regions in 2021 from a market guarantee expectations viewpoint. We find that the market selectively believes more in the bailout signal released by the ZHD pilot than in no-bailout signal, leading to an increase in implicit guarantee expectations instead of a decrease, which is contrary to the original policy intention. And it also has the heterogeneity of this selective belief psychology. We reveal that the market's trust in policy signals distorts policy effects.