Subnational Debt of China: The Politics-Finance Nexus
Posted: 1 Jul 2016 Last revised: 25 Dec 2019
Date Written: August 6, 2019
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
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