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The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes

60 Pages Posted: 22 Feb 2017 Last revised: 4 Sep 2017

Zhuo Chen

Tsinghua University - PBC School of Finance; Tsinghua University - PBC School of Finance

Zhiguo He

University of Chicago - Booth School of Business, and NBER

Chun Liu

Tsinghua University - School of Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: August 28, 2017

Abstract

China's four-trillion-yuan stimulus package fueled by bank loans in 2009 has led to the rapid growth of shadow banking activities in China after 2012. The local governments in China financed the stimulus plan mainly through bank loans in 2009, and resorted to non-bank debt financing after 2012 given the mounting rollover pressure from bank debt coming due, a manifestation of the stimulus-loan-hangover effect. Cross-sectionally, provinces with abnormally greater bank loan growth in 2009 experienced more Municipal Corporate Bonds issuance during 2012-2015, as well as more shadow banking activities including Entrusted loans and Wealth Management Products. We highlight the market forces behind the regulation changes on local government debt post 2012, together with the expedited reform on interest rate liberalization during that period.

Keywords: Local Government Financing Vehicles, Municipal Corporate Bonds, Shadow Banking in China

Suggested Citation

Chen, Zhuo and He, Zhiguo and Liu, Chun, The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes (August 28, 2017). Available at SSRN: https://ssrn.com/abstract=2920030

Zhuo Chen (Contact Author)

Tsinghua University - PBC School of Finance ( email )

43 Chengfu Road
Beijing, 100083
China

Tsinghua University - PBC School of Finance

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Zhiguo He

University of Chicago - Booth School of Business, and NBER ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/zhiguo.he/pubs.html

Chun Liu

Tsinghua University - School of Economics and Management ( email )

Beijing, 100084
China

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