'Eurozone Disease' in China: Regional Currency Overvaluation and Local Government Debt

59 Pages Posted: 31 Dec 2021

See all articles by Han Gao

Han Gao

Central University of Finance and Economics (CUFE)

Jie Li

Central University of Finance and Economics (CUFE)

Ming Lu

Shanghai Jiao Tong University (SJTU)

Huiyong Zhong

Formerly Known as Shanghai Institute of Foreign Trade

Date Written: 2021

Abstract

China and the eurozone are alike in terms of unbalanced regional growth and having a common currency. Inland China, with growth much slower than that of coastal China, calls for a weak currency. However, RMB, the common currency for all of China, cannot depreciate to match inland China’s weak fundamentals and is thus overvalued from the perspective of inland China. Without monetary autonomy to devalue its overvalued currency, inland China has to turn to debt issuance, leading to higher indebtedness in inland China. This study, therefore, establishes a link between regional currency overvaluation and local government indebtedness. We show that city-level currency overvaluation is positively associated with higher local government debt. Our findings suggest that a 1% increase in regional currency overvaluation prompts the new issuance of local government debt by approximately 0.2%. This effect can be magnified by a higher degree of labor market immobility and spatial disequilibrium.

Keywords: F1, G2

Suggested Citation

Gao, Han and Li, Jie and Lu, Ming and Zhong, Huiyong, 'Eurozone Disease' in China: Regional Currency Overvaluation and Local Government Debt (2021). Available at SSRN: https://ssrn.com/abstract=3997775 or http://dx.doi.org/10.2139/ssrn.3997775

Han Gao

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

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Jie Li (Contact Author)

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

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Ming Lu

Shanghai Jiao Tong University (SJTU) ( email )

800 Dongchuan Rd
Minhang, Shanghai 200240
China

Huiyong Zhong

Formerly Known as Shanghai Institute of Foreign Trade ( email )

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