Subnational Debt of China: The Politics-Finance Nexus

60 Pages Posted: 1 Jul 2016 Last revised: 22 Jul 2021

See all articles by Haoyu Gao

Haoyu Gao

Renmin University of China

Hong Ru

Nanyang Business School, Nanyang Technological University

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Date Written: May 13, 2020

Abstract

We provide direct evidence that governments selectively default on debt when they can identify creditors. Analyzing a comprehensive data set of subnational debt, we show that Chinese local governments choose to default on banks with weaker political power. A reduction in a bank’s political power relative to other banks increases the likelihood of selective default by local governments. Such default selections are driven by banks’ influence over politician promotion. When local politicians are highly ranked or connected to national leaders, they engage less in selective default as their promotion is less affected by bank loan defaults. Our findings suggest a politics-finance nexus through which government defaults are restrained.

Keywords: Government Debt, Selective Default, Politics-Finance Nexus, 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 (May 13, 2020). Journal of Financial Economics (JFE), 141.3, 881-895, Available at SSRN: https://ssrn.com/abstract=2801878 or http://dx.doi.org/10.2139/ssrn.2801878

Haoyu Gao

Renmin University of China ( email )

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

Hong Ru (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

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)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
886
Abstract Views
3,776
rank
32,888
PlumX Metrics