Understanding Local Government Debt in China: a Regional Competition Perspective

54 Pages Posted: 16 Jul 2019 Last revised: 14 Dec 2022

See all articles by Xi Qu

Xi Qu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Zhiwei Xu

Peking University HSBC Business School

Jinxiang Yu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management

Jun Zhu

Nanjing University of Finance and Economics

Date Written: June 1, 2019

Abstract

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

Suggested Citation

Qu, Xi and Xu, Zhiwei and Yu, Jinxiang and Zhu, Jun, Understanding Local Government Debt in China: a Regional Competition Perspective (June 1, 2019). Available at SSRN: https://ssrn.com/abstract=3420523 or http://dx.doi.org/10.2139/ssrn.3420523

Xi Qu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

No.535 Fahuazhen Road
Shanghai Jiao Tong University
Shanghai, Shanghai 200052
China

Zhiwei Xu (Contact Author)

Peking University HSBC Business School ( email )

PHBS 612, Unversity Town,
Nanshan District
Shenzhen, Guangdong
China

Jinxiang Yu

Shanghai Jiao Tong University (SJTU) - Antai College of Economics and Management ( email )

1954 Huashan Road
Shanghai, Shanghai 200030
China

Jun Zhu

Nanjing University of Finance and Economics ( email )

Nanjing
China

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