Subnational Debt of China: The Politics-Finance Nexus

64 Pages Posted: 1 Jul 2016 Last revised: 17 Nov 2018

See all articles by Haoyu Gao

Haoyu Gao

Central University of Finance and Economics (CUFE)

Hong Ru

Nanyang Technological University (NTU)

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Date Written: May 16, 2018

Abstract

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

Suggested Citation

Gao, Haoyu and Ru, Hong and Tang, Dragon Yongjun, Subnational Debt of China: The Politics-Finance Nexus (May 16, 2018). Available at SSRN: https://ssrn.com/abstract=2801878 or http://dx.doi.org/10.2139/ssrn.2801878

Haoyu Gao

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
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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