Local Debt Research Articles

House prices, financing mode and economic growth

This study delves into the intricate relationship between house prices and the economy, using a combined dataset of 287 Chinese cities and incorporating urban investment bonds, local government financing platforms, and land resources statistics. Key findings indicate that rising house prices boosted per capita gross domestic product before the financial crisis, but this effect diminished after the crisis. Although rising prices increased total output, they also heightened local debt risks, resulting in a double-edged impact. The study also found that government policies that caused a rapid increase in house prices disrupted resource allocation, jeopardizing urban sustainability. Research emphasizes the importance of carefully designed policies to ensure the balanced development of the real estate market, which is conducive to long-term economic health.

The Analysis of the Necessity and Impact of Property and Inheritance Taxes in China

The purpose of this paper is to explore the necessity and possible impact of the implementation of property tax and inheritance tax in China based on the Western tax system and the existing experience and background in China. After understanding the provisions of the Western tax system, the comments of Western people, and the results of relevant experiments in China, we found that China’s existing economic structure may create a number of problems and the low level of asset mobility of a small number of high-net-worth individuals and their small contributions to social and economic consumption also require a new tax for social wealth redistribution. Property tax and inheritance tax would be the right solution to local debt and social equity problems.

Trump’s Supreme Court Justices Must Kick Him Off the Ballot

The 1994 Reform of Tax Sharing System (TSS) of China changed the current Chinese society a great deal. This paper starts with issues revealed from present news, by discussing the causes and effects of the Reform of Tax Sharing System, and therefore takes relatives issues such as the Fiscal Responsibility System (FRS),the Land Finance(LF),the Local Debt(LD) into consideration. This paper intends to analyze such issues in the perspective of legal system and eventually summarize them using Lewis Coser’s Combination of Structural Functionalism and Social Conflict Theory, i.e. the theory emphasized in The Function of Social Conflict. The history showed in this paper, concerns the evolution of Chinese legal system including the Chinese Constitution. Meanwhile, the theory combined Structural Functionalism and Social Conflict Theory offers quite some explanation power when analyzing issues above. Besides, this paper is more like a report of syntopic reading about a series of articles and books concerning TSS, FRS, LF and LD.

Local government fiscal stress and regional entrepreneurship: Evidence from a natural experiment in China

Employing the abolition of the agricultural taxes in 2005 in China as a natural experiment, this paper investigates the impact of local government fiscal stress on regional entrepreneurship. We find that the reform results in increased fiscal expenditure and decreased new firm entry. This result suggests that local government fiscal stress is a significant hindrance to regional entrepreneurship, particularly in areas with low fiscal self-sufficiency, limited financial development, and weak legal systems. We also explore the mechanisms through which agricultural tax abolition affects entrepreneurial activities. Our findings indicate that four mechanisms are effective in influencing entrepreneurship, including enhanced tax collection and management, increased local debt, rising land prices, and heightened uncertainty perception by entrepreneurs. Overall, our research provides new insights into the relationship between local fiscal stress and economic development from the perspective of regional entrepreneurship.

Local Debt and Social Welfare in China: Evidence from Zhejiang and Anhui

Currently local government debt is a major concern for all sectors of society, but there is still a debate about the relationship between local government debt and social welfare. This paper addresses the question of the impact of local debt and social welfare in China, using a case study of data from Zhejiang and Anhui from 2014-2019 to qualitatively analyze the impact of local debt and social welfare in four dimensions: consumption, infrastructure, education, and health. The results found that: first, the growth of local debt has an inverted U-shaped impact on residents' welfare, which is manifested in the fact that before the size of local debt reaches the critical value, the increase of local debt can enhance social welfare, but after exceeding the critical value, the increase of local debt makes social welfare decline; second, in terms of sub-welfare index factors, there are different correlation degrees between different factors and the indicators of local debt, and thus have different characteristics of development at different stages are characterized by different developments.

‘One System, Two Shadows’: A local public finance perspective on China's shadow banking system

Why does shadow banking persist in China despite repeated policy efforts to contain it? While studies of informal finance have traditionally emphasized the credit needs of private businesses as a demand-side explanation, this study contends that China's local public finance also constitutes an important driver for shadow banking. Based on document research and administrative data, we find that China's shadow banking system has bifurcated into two segments since the Global Financial Crisis (GFC). One is the ‘entrepreneurial shadow’ that has long provided informal credit to the private sector, especially small- and medium-sized enterprises. The other is a ‘fiscal shadow’, which serves property developers and local government financing vehicles (LGFVs), the two pillars of China's land-based local public finance regime. Property developers are major contributors to local fiscal revenues through the land economy, while LGFVs function as off-balance sheet backdoor financing intermediaries for local governments.Although localities have borrowed from unconventional sources throughout the reform era, the central government's GFC stimulus plan marked a turning point by fueling a debt-financed real estate and infrastructure construction boom. Property developers and LGFVs were launched onto a highly leveraged model of feverish expansion for over a decade. When the central government abruptly reversed its course by restricting the availability of formal credit, they became further entangled into the fiscal shadow for refinancing. Local public finance has thus become reliant on shadow banking, despite subsequent policy efforts to curb such activity. Our findings suggest the need for a more integrated analytic and regulatory framework that recognizes the mutual dependence between shadow banking and local debt – two major sources of systemic financial risks in China.

How does local debt expansion affect earnings management? Evidence from China

ABSTRACT This paper explores the impacts of local government debts (LGD) on earnings management strategy and moderation effects of internal control. Using a purpose-build database incorporating Chinese LGD and listed firms, we find that firms engage in income-increasing earnings management in response to local debt expansion. The results remain stable to endogeneity tests and various robustness checks. Furthermore, the impacts of LGD are markedly pronounced in non-SOEs, firms audited by Big 4 auditors, young and declining firms, and firms located in less-marketized regions. Moreover, this study reveals that internal control exerts moderation effects on the relation between LGD and earnings management.

Financial institution agglomeration and corporate labor allocation efficiency—Based on the context of government debt expansion

This study investigates how financial institution agglomeration affects labor allocation efficiency in non-financial firms listed on China's A-share markets, within a context of expanded government debt and relaxed local debt financing controls. Results show that such agglomeration significantly improves labor efficiency, mainly by easing financing constraints. The positive impact is stronger in non-state-owned and manufacturing firms.

Nexus between carbon emissions and local debt risk: Evidence from China's prefecture-level cities

Debt risk is an externality of carbon emissions in the greening transformation process. Based on panel data of 171 prefecture-level cities in China from 2012 to 2020, this article empirically analyzed the influence and mechanism of carbon emissions on local debt risk. The results can be concluded as follows: (1) Carbon emissions will significantly induce local debt risk. After considering the endogenous problem and serial robustness tests, the conclusions above are still valid. (2) Local debt risk itself has a cumulative expansion effect stimulate by carbon emissions. And carbon emissions will strengthen the depth of local debt risk with the increase of local debt risk. (3) The moderating impact of carbon emissions on local debt risk has heterogeneous characteristics, with different industrialization processes, developmental level of scientific and technological innovation, and corporate environmental management regulation. This article not only provides a new evidence for carbon emissions externality from local debt risk perspective, but also provides a useful reference for local governments to enhance debt risk governance, and orderly implement reduction action of carbon emissions.

The impact of local government debt on entrepreneurship: Evidence from a quasi-natural experiment of local debt governance reform

We investigate the impact of China's New Budget Law of 2015 on local entrepreneurship. The legislation introduces exogenous limitations on local governments' debt-financing mechanisms. Our findings suggest that rates of new business registration experience an uptick following this change in debt management, which implies the reform can bolster local entrepreneurial ventures. This effect is more pronounced for firms operating in cities characterized by poor financial infrastructure, elevated fiscal stress, limited market openness, or inadequate legal frameworks. Supplementary analysis reveals that enhanced access to broader financing options, alleviated local tax and non-tax obligations, optimized urban land use, and reduced firms' perceptions of economic uncertainty serve as four mechanisms underlying our findings. Collectively, this governance modification mitigates the crowding-out effect exerted by local government debt on private-sector activity, leading to an increase in local entrepreneurship.

The financialization of local government debt in China and its risk transmission to commercial banks

China's local government debt has risen sharply due to fiscal stimulus and decentralized financing. This debt expansion increases systemic risk as default risk is transmitted to banks, the primary holders of local debt. Using a Dynamic Stochastic General Equilibrium model incorporating local governments and banks, we show that local debt expansion increases banks' nonperforming loans and crowds out private credit, increasing bank risk-taking. We empirically examine 2010–2019 data on 350 Chinese banks and find that the level of local debt positively impacts bank risk-taking, especially low-capital, nonstate, and unlisted banks. The mechanisms operate through an increase in nonperforming loans due to default risk and a reduced regional repayment capacity due to crowded-out private credit. Our study reveals the impact of local debt on bank risk and financial stability in China. Policy implications include strengthening bank regulation and pursuing diversified government financing.

Study of the Impact of Fiscal Transparency on Local Government Debt

Since socialism with Chinese characteristics has entered a new era, the important task of reforming the fiscal and taxation system has been put on the agenda, and the report of the Twentieth National Congress proposes to accelerate the improvement of the modern financial and budgetary system, and it is necessary to establish a comprehensive, standardized and transparent budgetary system with scientific standards and strong constraints. This paper starts from the direction of standardization and transparency to study the problems related to fiscal transparency. We do empirical analysis and research on fiscal transparency and local debt scale, and finally conclude that there is not a single relationship between the two, but both promote and inhibit the effect. Finally, it puts forward relevant suggestions from the perspectives of fiscal transparency, proxy and budget constraint.

Empirical Analysis of the Efficiency of Provincial Debt Expenditure in China

Improving the efficiency of local government debt expenditure is the key to preventing and resolving local debt risks in China. Using a three-stage SBM-DEA model, a input-output index system was constructed to calculate and analyze the efficiency of government debt expenditure in 30 provinces and cities (districts) across the country. The results showed that the overall level of local government debt expenditure efficiency in the country was relatively high; There is a significant difference in the efficiency of local debt in the eastern, central, and western regions. The efficiency of local debt expenditure in the eastern region has significant advantages, while the efficiency of local debt expenditure in the western region urgently needs to be improved; The degree of financial deepening, population size, and local debt expenditure efficiency are significantly positively correlated, while fiscal expenditure decentralization is negatively correlated with local debt expenditure efficiency.

Exploration and Improvement Path of Local Government Debt Risk Warning Mechanism Based on KMV Model: Taking Bengbu, Anhui as an Example

This article is based on the KMV model and explores methods for improving the local government debt risk warning mechanism under the backdrop of the pandemic, with a case study of Bengbu City in Anhui Province, China. In the context of an economic downturn and the impact of the COVID-19 pandemic, accurately understanding and effectively managing the fiscal risks of local governments is particularly important. The study focuses on analyzing the impact of changes in fiscal revenue and expenditure structures during the pandemic on local debt risks, using the KMV model for in-depth analysis. By comparing fiscal data from different time periods, the effectiveness of the existing local government debt risk warning mechanisms was evaluated. This paper also discusses how to improve risk management and proposes specific strategies and suggestions. These recommendations aim to enhance the efficacy of local government debt warning systems, especially considering the unique challenges brought about by the pandemic and economic changes. The study shows that by improving fiscal risk management and optimizing warning mechanisms, it is possible to better respond to various economic challenges that may arise in the future, providing local governments with more robust and reliable financial risk control plans.

Financial Variables and Their Effects on The Development of Bank Credit and Productive Sectors in Iraq Using a Path Analysis Model

This study aims to measure and analyze the direct and indirect effects of the financial variables, namely (public spending, public revenues, internal debt, and external debt), on the non-oil productive sectors with and without bank credit as an intermediate variable, using quarterly data for the period (2004Q1–2021Q4), converted using Eviews 12. To measure the objective of the study, the path analysis method was used using IBM SPSS-AMOS. The study concluded that the direct and indirect effects of financial variables have a weak role in directing bank credit towards the productive sectors in Iraq, which amounted to (0.18), as a result of market risks or unstable expectations in the economy. In addition to the weak credit ratings of borrowers, this is on the one hand, and on the other hand, the majority of the credit granted by the Iraqi banking system has been directed towards the construction sector as a result of the guarantees that this sector can provide compared to other productive sectors. On the other hand, financial variables were not supportive in directing bank credit towards the development of these sectors in the country's GDP because the results reflected by the direct and indirect effects of financial variables were weak in supporting productive sectors with or without bank credit. (Especially since the local debt was competing with the private sector in obtaining bank credit, and this is called the effect of crowding out.)

Countercyclical central government transfers incentivize local government overborrowing: Theory and evidence

Local governments in China have strong incentives to overborrow, leading to unsustainable local debt. Recent research suggests that higher central government transfers serve as a key incentive for local governments to overborrow. This paper constructs a theoretical model and shows that it is the countercyclicality of central government transfers, that is, the negative correlation between transfers and local revenues, that act as the main incentive for local governments to overborrow. We test the model predictions using hand-collected provincial data on local government debt and budgets. The empirical evidence strongly supports the prediction that the negative correlation—not the magnitude—of central government transfers is the main driver of the incentive for local governments to borrow excessively. The countercyclical nature of central government transfers provides insurance against local government debt service, thereby increasing the incentive for local governments to borrow. The findings suggest the need to change the central government transfer policy framework.

Regulating local government debt within growth trade-offs: a case study of China’s fiscal consolidation policy

ABSTRACT Local government debt is integral to China’s fiscal framework. Faced with mounting debt risks, China’s central government launched an expansive fiscal consolidation in 2016. Drawing on in-depth interviews and a case study, our research reveals that this measure signifies China’s introduction of de facto fiscal regulations. These regulations have prompted local governments to navigate the complexities of growth objectives and fiscal mandates. Our findings suggest that traditional consolidation strategies are not always effective in the distinct local context of China. As a result, local budgets are increasingly dependent on revenues from land-transfer fees. Notably, the consolidation plan incorporates provisions that allow potential ‘loopholes’ for local authorities, potentially compromising its overall effectiveness. This study sheds light on the intricate dynamics of local debt management, the Plan’s stipulated measures, and the overarching economic context, offering insights into the fiscal challenges faced by China.

Local Government Debt and Corporate Investment Behavior in China: Real versus Financial Investment

The ongoing expansion of local government debt (LGD) in China constitutes a significant impediment to economic development, while the existing literature predominantly concentrates on macro-level investigations, neglecting the repercussions of government debt expansion on firms. Firms serve as fundamental constituents of the real economy, and the suitability of their investment structure is a pivotal determinant of their robust development. Therefore, it is of great significance to investigate whether the investment structure of non-financial firms will undergo deviations attributable to the expansion of local government debt. This paper uses a two-way fixed-effects model to examine the causal effect of local government debt on firms’ investment structures. The quasi-natural experiment using the DID model with “Document 43” issued by China on local government debt governance as a policy shock can be a good endogeneity test. It is found that local government debt exacerbates the trend of “exit from real to virtual” of enterprises, leading to a bias towards financial investment in the investment structure of enterprises, and this result is still robust after a series of robustness tests. A heterogeneity analysis shows that the impact of LGD on the investment structure of firms mainly exists in non-state-owned firms, small-scale firms, and firms with high financing constraints. Overall, this study provides new evidence on how the government influences the investment structure of Chinese firms through the perspective of LGD, which helps firms to prevent and cope with the risks associated with LGD. Furthermore, it offers practical references and policy insights for government initiatives in the realm of local debt governance.

Land Financing Model and Local Government Debt Governance: An Empirical Study of Prefecture-Level Cities in China

This paper addresses the lack of comprehensive research on land financing in relation to local government debt governance. It examines two land financing methods: "Getting revenue by selling land" and "land finance," using an endogenetic approach. The study analyzes the interactive relationship between local government debt expansion and land financing modes using panel data from Chinese prefecture-level cities. Key findings include: (1) Land financing methods significantly increase local government debt leverage, with varying performance levels. (2) Regional economic competition and financial status influence the interaction between land financing and local debt risk. (3) Fiscal and financial policies regulate local government's land financing behavior, leading to diverse approaches. To achieve effective fiscal and financial governance, it is crucial to establish a strong connection between local government debt risk prevention/control and land use mode. Implementing differentiated systems can enhance land use efficiency.

China's Economic Rejuvenation Policy Adjustment in the Post-Epidemic Period -- Against the Background of Local Financial Problems, Rapid Aging of Society, and Sino-US Trade Tension

Since China officially lifted the nationwide blockade and entered the post-epidemic era, various problems have gradually surfaced. The real estate industry is suffering, unemployed people have reached a new high, medical insurance reform has been hindered, import and export trade has shrunk, and economic growth has slowed sharply. There are many reasons behind it, but they are all related to three major backgrounds: local financial difficulties, a rapidly aging society, and Sino-US trade frictions. Judging from the current situation, China's economic downturn will not change in the short term. There is an urgent need for a response to the question of how to stop economic decline as much as possible, lessen the burden on the populace, manage this crisis effectively, and use it as a chance to release risks, upgrade industrial capacity, and set the groundwork for a future economic revival. Based on the obtained secondary documents, this paper mainly uses Japan, which has a similar cultural background and economic development process, as a comparison object to study the relevant policies and regulations newly promulgated by the Chinese government in the fields of local debt, social aging, and Sino-US trade frictions. Through the analysis of this paper, the current Chinese government should not continue the active and loose economic policy it adopted after the Reform and Opening in 1978, but rather should weaken government operations, cut spending, loosen market economy restrictions, and eventually reform the economic system.