Subnational Debt of China: The Politics-Finance Nexus
71 Pages Posted: 1 Jul 2016 Last revised: 5 Dec 2017
Date Written: December 5, 2017
Using comprehensive proprietary loan-level data, we analyze debt borrowing and default of local governments in China. Contrary to conventional wisdom, policy bank loans to local governments have significantly lower default rates than commercial bank loans with similar characteristics. Due to the importance of policy bank loans for the advancement of local politicians’ careers, distressed local governments often strategically choose to default on loans from commercial banks. This selection became more pronounced after the abrupt ending of the “4-trillion” stimulus, when China started tightening local government borrowing. Our findings shed light on a potential approach to hardening budget constraints for local governments.
Keywords: Local Government Debt, China, China Development Bank, Policy Loans, Political Promotion
JEL Classification: G21, G32, H74
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