Government Restriction, Trading Network, and Bond Yield: A Quasi-Natural Experiment Based on the Chinese Inter-Bank Bond Market

Whether government regulation can improve market efficiency is a contentious and significant issue. This study examines spot transaction data from China’s bond market in 2018 and concludes that government regulation directly corrects market pricing. Additionally, it empowers the secondary market to improve its price discovery and risk identification functions, thereby enhancing market efficiency. The study does this by using the introduction of pricing restrictions on local government bond issuance in August 2018 as a quasi-natural experiment. Unlike existing studies that focus more on ordinary markets, this study provides a representative example of financial markets for the public interest theory of regulation.