Local Government Debt Risk Research Articles

The nexus between local government debt risk, real estate sector, and financial stability

Rising local government debt and downturn in the real estate sector pose significant challenges to China’s economic growth and financial stability. To analyze these challenges, this paper develops a dynamic stochastic general equilibrium (DSGE) model to study the nexus between government debt risk, real estate sector, and financial stability. The findings suggest that an increase in debt risk initiated by a housing demand shock could have a persistent and magnified effect on the financial sector and the macroeconomy. The amplification mechanism originates from risk spillover and debt crowding-out effect, which trigger the negative feedback between the debt and financial risk. Longer debt maturity and the implementation of credit policy could effectively moderate the contractionary effects of this risk interaction on the economy.

A Literature Review on the Causes and Spillover Effects of Local Government Debt Risk

A Literature Review on the Causes and Spillover Effects of Local Government Debt Risk

Local Government Debt Risk: Current Situation and Formation Mechanism

Local Government Debt Risk: Current Situation and Formation Mechanism

The grand bargain on local government debt: Evidence from China's intergovernmental relations

IMPACT This article provides a deeper understanding of policy implementation in local government, highlighting the key role of subnational governments in public risk governance. In fiscally centralized countries with significant local government debt problems, officials at the central government level cannot effectively mitigate local government debt risks solely through restrictive financing policies. The authors explain why policy-makers at the central government level in these countries need to revaluate the structure of the local government financial system.

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.

Has inspection supervision effectively reduced the risk of local government debt? Evidence from China

This paper employs a difference-in-differences (DID) model to analyze data from 289 Chinese prefecture-level cities from 2009 to 2016 and comes to the following conclusion: patrol supervision can reduce the risk of local government debt. After conducting a series of robustness tests, including propensity score matching (PSM) tests, transformation study design, and replacement of explained variables, this conclusion remains robust. Further investigation reveals that the effectiveness of inspection and supervision in reducing local government debt risk is more pronounced in regions with a poorer financial ecological environment and a greater soft budget constraint, indicating a substitute function. By examining the impact of patrol supervision on local government debt risk, this paper provides valuable insights for preventing and resolving major risks and offers up recommendations for future efforts in this domain.

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.

Land Finance, Real Estate Market, and Local Government Debt Risk: Evidence from China

The financing function of land in China has been extensively documented, but little research has explored the role of land finance in the real estate market affecting local government debt. In light of the recent simultaneous increase in China’s real estate market risk and local government debt risk over the past two years, a pressing need to reevaluate the significance of land finance has arisen. Thus, this study explores the role of land finance in the relationship between the real estate market and local debt risk. The data were collected from 224 Chinese cities from 2010 to 2019. The study found that real estate market prosperity significantly promotes the expansion of local government debt. Land finance acts as a mediator and a moderator in this relationship. The study also found that during periods of real estate market booms, local governments tend to sell more land, which reinforces their debt-raising behavior and exacerbates the impact of the real estate market on local government debt; during periods of real estate market downturns, local governments tend to decrease debt, but the government debt repayment risk increases significantly. Furthermore, the amplifying effect of land finance is more pronounced in economically developed regions and cities with higher public budget revenues.

Promotion incentives, tenure uncertainty, and local government debt risk

In this paper, we investigate how officials’ promotion incentives and tenure uncertainty affect the local government debt risks in China. We find that the promotion incentives of officials could increase the local government debt risk, but there is no direct relationship with explicit local debt risk. There is a significant U-shaped relationship between officials’ promotion incentives and local government debt size as tenure uncertainty increases. Our results remain robust after replacing the explanatory variables and endogeneity tests. Furthermore, local government debt risk is more likely to be affected by promotion incentives and tenure uncertainty when local officials have been promoted or work in eastern China. The influence of province governors on local debt risk is more relevant than that of provincial party secretaries.

Risk Assessment of Local Government Debt: Evidence from China

The risk of local government debt has been a robust indicator of regional economic development and the smooth operation of local government. The promulgation and implementation of the new Budget Law in 2014 also reflect the determination of China to control government debt risk. Based on the DPSIR model, this paper defines the logical relationship among the driving force, pressure, debt status, influence, debt repayment ability, and local government debt risk. Combined with the entropy method, this paper analyzes the debt risk level of 30 provinces, municipalities, and autonomous regions in China from 2013 to 2019. The results show that there are apparent regional differences in the debt risk of local governments in China. The debt risk evaluation of the southwest region is higher than the average level in other regions. Overall, we show a downward and upward trend through further analysis of the internal structure and causes of local government debt risk. We offer implications for countermeasures and suggestions.

The Impact of Chinese New Budget Law on the Issuance cost of Urban Investment Bonds

Abstract In the context of the continuously increasing risk of local government debt, reducing the issuance cost of urban investment bonds have become major concerns in society. Studying the impact and mechanisms of the new budget law, implemented under a stringent regulatory environment, on the issuance cost of urban investment bonds holds significant practical implications. This paper selects balanced panel data of urban investment bonds and industrial bonds issued nationwide from 2009 to 2021 as the research sample. The multi-period difference-in-differences (DID) method is employed to examine the impact and mechanisms of relevant government actions on the issuance cost of urban investment bonds. The results indicate that the promulgation and implementation of the new budget law have reduced the issuance price and financing cost of local bonds, thereby improving the financing environment for urban investment bonds. The examination of the action mechanisms reveals that the debt repayment situation of each province in these years plays a strong moderating role in the policy's impact. Moreover, these government actions influence the pricing and financing environment of urban investment bonds by standardizing their ratings. The research conclusions of this paper hold clear policy implications, providing guidance and reference value for the work of relevant government departments. JEL classification numbers: C12, D74. Keywords: Urban investment bonds, Bond prices, Systemic financial risk.

The crowding out effect of government debt on corporate financing: Firm-level evidence from China

The local government debt risk has attracted government regulators' attention, and its economic consequences have become a new research topic. Based on data from Chinese prefecture-level cities, this paper empirically examines the impact of local government debt on corporate financing from 2006-2018. The results show that government debt financing reduces total corporate debt financing, increases the cost of corporate debt financing, and has a crowding-out effect on corporate debt financing. Local government financing through the financing platform company injects quality projects and reduces the financing constraints of the financing platform to attract credit resources from banks. Insides, the government provides a guarantee for the financing platform company and reduces the bond risk of the financing platform to attract investors to purchase. Severing the link between local governments and financing platform companies can reduce the crowding-out effect to a certain extent. The results of this paper provide evidence for the micro effects of local government fiscal policy, which are informative for further improving the financing capacity of enterprises.

Local governments’ debt risk and enterprise innovation

ABSTRACT This paper applies KMV modified model to construct a local governments’ debt risk index by using the local governments’ financial revenue and expenditure data and the data of Chinese A-share listed companies, and studies the relationship between local government debt risk and enterprise innovation. The results show that the increased risk of local government debt can encourage enterprises to increase R&D investment, which is more significant when the enterprises are politically connected, the provincial officers have a longer tenure, the provinces are more market-oriented, and the enterprises get more refunds of taxes. This paper provides empirical evidence for the state theory, which suggests that competition for political promotion among local officials can make the goal of personal political promotion of officials agree to intend to maximize social welfare.

Do high-speed rail (HSR) station and airport affect local government debt risk? Evidence from China

This study examines the differential impact of HSR station and airport on local debt risk during the construction and operation stage. Based on the data of China's prefecture-level cities from 2010 to 2019, Feasible Generalized Least Square (FGLS) model results show that HSR station under construction reduces local debt risk by attracting extra-municipal capital inflows. However, the more HSR stations and airports are opened, the more local governments invest in other infrastructure, leading to increased local debt risk. By dynamic test, it is found that the longer the opening time, the greater the difference between the positive impact of HSR stations and airports on debt risk. Further synergies suggest that both local governments and investors have high expectations for urban development driven by HSR stations rather than airports, and the presence of HSR station amplifies the positive external effects of the airport construction. These findings not only deepen the understanding of the risk impact of HSR station and airport, but also provide enlightenment for countries to develop HSR station and airport through debt.

The impact of fiscal decentralization and intergovernmental competition on the local government debt risk: Evidence from China

Based on the data of explicit debt and implicit debt of local governments in China from 2012 to 2020, this paper theoretically analyzes and empirically tests the spatial correlation effect of fiscal decentralization and intergovernmental competition on local government debt risk. It’s found that local government debt risk has obvious inertia effect in time and positive spatial correlation effect in space, and local fiscal spending decentralization and intergovernmental competition have a significant positive impact on the local government debt risk, as well as a positive spatial spillover effect. The research of this paper has very important policy implications for perfecting China’s decentralization system, standardizing the competition among governments, and preventing and defusing local government debt risks.

Digital Finance, Fiscal Transparency and Government Debt Risk

The expansion of the breadth of coverage and depth of use of digital finance greatly improves the efficiency of financial services to the real economy, and has an important impact on the economic development of local governments in China. This paper takes the provincial local government debt risk data from 2011 to 2020 as the research sample to deeply investigate the effect and mechanism of digital finance on local government debt risk. The results show that, firstly, digital finance can effectively suppress local government debt risk, and a significant long-term suppressive effect is found by quantile model test. Secondly, in the mechanism of action test, digital finance effectively alleviates local government debt risk through the path of local government fiscal transparency, and has played a significant regulating effect. Finally, based on different regions and development levels, the effect of digital finance on local government debt risk is found to be more significant in eastern regions and regions with high urbanization levels. The findings of this paper provide some theoretical value and practical significance for preventing the occurrence of local government debt risk and regional systemic risk.

Effect of land price distortion on land use efficiency: Evidence from China

Land price distortion will not only lead to a series of economic problems such as widening regional economic gap, local government debt risk and serious ecological deterioration, but also lead to the imbalance of macro allocation of land resources and irrational spatial structure, and the land input-output efficiency will also be affected. This article studies the impact of land price distortion on China’s land use efficiency using a dataset of 103 cities in China during the years 2008–2015. The results show that there exist significant spatiotemporal disparities of land use efficiency. The land use efficiency has significant spatiotemporal differences. Empirical results document that increases in land price distortion leads to significant decreases in land use efficiency. Our findings are robust to alternative measures of land price distortion, different subsamples and instrumental variable estimations.

Local Government Debt, Financial Circle, and Sustainable Economic Development

Local government debt is the biggest “gray rhino” of China’s economy and one of the most significant factors affecting the sustainability of economic growth. We use the macroeconomic data of China’s real economy development level and local government debt from 2000 to 2020 to investigate the impact of local government debt on the real economy using the spatial Durbin model, focusing on the impact of the local government debt scale on the development of the real economy in jurisdictions and non-jurisdictions and the intermediation effect of finance under the geospatial correlation characteristics of economic development. The results show that the spatial correlation of the real economy between jurisdictions prevails and the correlation deepens over time. The scale of local government debt in China has exceeded a reasonable threshold, and the crowding-out effect of debt expansion on the real economy is obvious and not limited by jurisdictions, with significant spatial spillover effects. Financial marketization can effectively mitigate the crowding-out effect of local government debt on the real economy. These findings provide useful references for mapping the correlated development characteristics of local government debt and the real economy in China, effectively preventing local government debt risks and high leverage of the real economy and financial systemic risks, and providing effective insights for other countries to resolve government debt problems, prevent crises, and promote local economic development.

Risk Measurement of Local Government Debt Based on Complex Networks: Taking China’s Urban Investment Bonds as an Example

For many countries, the systemic risk of local government debt is a matter of concern, but at present, there is little analysis in this area. The complex network based on information analysis provides an effective tool for analyzing the system risk between networks. This paper takes China as an example and takes the provincial urban investment bonds as the object for research. The regional network constructed with the interest rate data of urban investment bonds represents the overall systemic risk of these bonds. The main conclusions are as follows: provincial nodes in western and central areas (underdeveloped areas) are more important in the system, and they are more easier to form debt defaults. For an interconnected urban investment bond network, the higher the default risk of an individual, the greater the risk of the entire system. Finally, based on the indicators obtained from the provincial urban investment bond network model, this paper puts forward policy suggestions for the prevention of urban investment bond risks.

Debt Risk of Green Bonds Issued by Local Governments in Shandong Province Based on KMV-Logistics Mixed Early Warning Model

In recent years, China’s green development has entered a new stage with profound changes in development conditions. Progress in development has put forward higher requirements for the safe and stable operation of the financial and economic environment. This paper predicts the default probability of the scale of green bond debt that should be repaid by municipal governments in Shandong Province from 2020 to 2022 and combines the KMV-Logistics mixed model to provide new ideas for the existing local government debt early warning indicator system. This paper draws the following main conclusions: On the whole, it is predicted that the debt situations faced by local governments in Shandong Province in issuing green bonds from 2020 to 2022 are as follows: the municipalities with high debt risks in 2020 include Dezhou, Liaocheng, and Zaozhuang; the cities with high debt risk in Shandong Province in 2021 include Linyi, Heze, Dezhou, and Weihai; the cities in Shandong Province with high debt risk in 2022 include Dezhou, Heze, Rizhao, and Zaozhuang, among which, Zaozhuang and Dezhou have been in high-risk states for three consecutive years. Therefore, in order to reasonably control the debt risks faced by local governments in Shandong Province issuing green bonds, it is necessary to take multiple measures to strengthen the supervision of local government debt borrowing methods, dynamically monitor and prevent local government debt risks, and effectively strengthen the management of local government debt funds.