Subnational Debt of China: The Politics-Finance Nexus
64 Pages Posted: 1 Jul 2016 Last revised: 17 Nov 2018
Date Written: May 16, 2018
Using proprietary loan-level data, we provide the first large-sample evidence on local government default in China. Government defaults are often strategic and selective: holding borrower credit risk fixed, distressed local governments choose to default on banks with relatively weaker political power. Such selective default is more pronounced for borrowing governments led by less powerful politicians. In contrast, default by non-government borrowers is unrelated to political power. We use exogenous shocks to local politicians’ connections with top leaders and a policy change that affected the political power of banks to identify the causal effect of political power struggle on loan default.
Keywords: Local Government, Selective Default, Political Power
JEL Classification: D72, G21, G32, H74
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