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Subnational Debt of China: The Politics-Finance Nexus

71 Pages Posted: 1 Jul 2016 Last revised: 5 Dec 2017

Haoyu Gao

Central University of Finance and Economics

Hong Ru

Nanyang Technological University

Dragon Yongjun Tang

The University of Hong Kong - Faculty of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 5, 2017

Abstract

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

Suggested Citation

Gao, Haoyu and Ru, Hong and Tang, Dragon Yongjun, Subnational Debt of China: The Politics-Finance Nexus (December 5, 2017). 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 ( email )

No.39, XueYuan South Road
Haidian District
Beijing
China
010-62288675 (Phone)

Hong Ru (Contact Author)

Nanyang Technological University ( email )

S3-B1A-07, 50 Nanyang Avenue
Singapore, Singapore 639798
Singapore
(+65) 6790-4661 (Phone)

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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