Subnational Debt of China: The Politics-Finance Nexus

Posted: 1 Jul 2016 Last revised: 25 Dec 2019

See all articles by Haoyu Gao

Haoyu Gao

Renmin University of China

Hong Ru

Nanyang Technological University (NTU)

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Date Written: August 6, 2019

Abstract

We provide the first large-sample evidence of selective default on government debt. Using comprehensive loan-level data, we find that local governments in China choose to default on banks with weaker political power. Defaulting on the loans from powerful banks hurts the promotion chances of local politicians, except those who are highly ranked or connected to national leaders. Consequently, relatively more powerful local politicians engage less often in selective defaults on bank loans. In contrast, we do not observe such creditor discrimination for local government bonds, for which the identities of bondholders are often unknown due to secondary market trading.

Keywords: Government Debt, Selective Default, Career Concern

JEL Classification: D72, G21, G32, H74

Suggested Citation

Gao, Haoyu and Ru, Hong and Tang, Dragon Yongjun, Subnational Debt of China: The Politics-Finance Nexus (August 6, 2019). Available at SSRN: https://ssrn.com/abstract=2801878 or http://dx.doi.org/10.2139/ssrn.2801878

Haoyu Gao

Renmin University of China

Mingde main building
Haidian district, No. 59,
Beijing, Beijing 100872
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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