N°25-25: Extreme Rainfall and Municipal Financing: Risk Pricing and Adaptive Mitigation by Sponge Cities

How do extreme weather and climate adaptation affect local financing cost? To answer this question, we examine the impact on Chinese municipal corporate bonds of both extreme rainfall and the Sponge City Pilot program. A one standard deviation increase in rainfall raises bond issuance spreads by 16 bps on average, but Sponge Cities manage to more than offset that. Further analysis demonstrates that the savings from reduced borrowing costs, coupled with broader economic gains in employment and corporate profits, far outweigh the program's investment costs. These findings underscore the importance of urban resiliency in shielding local finances from climate risks.