Subnational Debt of China: The Politics-Finance Nexus

81 Pages Posted: 1 Jul 2016 Last revised: 22 May 2018

Haoyu Gao

Central University of Finance and Economics (CUFE)

Hong Ru

Nanyang Technological University (NTU)

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: May 16, 2018

Abstract

Using comprehensive proprietary loan-level data, we analyze debt default of local governments in China. We document that, unbeknownst to the public, many local governments in China default on their bank loans. Their default decisions are often strategic: for the same loan facilities, distressed local government borrowers choose to default on commercial banks rather than a powerful development bank. Moreover, this selective default is more pronounced for local governments with less powerful politicians. Two policy changes allow us to identify the causal effect of political power on default decisions. Increases in political power of borrowers or decreases in political power of lenders lower lenders’ priority to receive debt payments. Our findings shed light on the soft budget constraint problem for government debt.

Keywords: Local Government Debt, China, China Development Bank, Political Power

JEL Classification: G21, G32, H74

Suggested Citation

Gao, Haoyu and Ru, Hong and Tang, Dragon Yongjun, Subnational Debt of China: The Politics-Finance Nexus (May 16, 2018). Available at SSRN: https://ssrn.com/abstract=2801878 or http://dx.doi.org/10.2139/ssrn.2801878

Haoyu Gao

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Hong Ru (Contact Author)

Nanyang Technological University (NTU) ( email )

S3-B1A-07
50 Nanyang Avenue
Singapore, 639798
Singapore
(+65) 67904661 (Phone)

HOME PAGE: http://https://hongru.mit.edu/

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics ( email )

KKL 1004
Pokfulam Road
Pokfulam
Hong Kong
(852)22194321 (Phone)

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