Understanding Local Government Debt in China: a Regional Competition Perspective
54 Pages Posted: 16 Jul 2019 Last revised: 14 Dec 2022
Date Written: June 1, 2019
The GDP tournament among local governments plays a crucial role in supporting China's growth miracle. Investment-driven economic growth has led to a surge in local government debt in the past decade. Using a comprehensive dataset of prefectural-level government debt, we find that regional GDP competition has an asymmetric impact on the local government debt. With GDP growth falling behind its competitors, a local government tends to issue debt more aggressively. In contrast, the effect is insignificant for the regions with GDP growth ahead of their competitors. Furthermore, we find that the regulatory policy implemented in 2015 effectively dampens the impact of regional competition on local government debt. However, debt limit constraints are time-variant and present spatial heterogeneity. In regions with loose borrowing constraints, regional GDP competition still matters for local government debt expansion even if debt quota management is put in place.
Keywords: Local Government Debt, Regional Competition, Government Debt Reform, Chinese Economy
JEL Classification: E60, G18, R11, R53
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