IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v133y2024ics0264999324000439.html
   My bibliography  Save this article

The financialization of local government debt in China and its risk transmission to commercial banks

Author

Listed:
  • Zhu, Jun
  • Zhu, Man
  • Yang, Zhiwei

Abstract

China's local government debt has risen sharply due to fiscal stimulus and decentralized financing. This debt expansion increases systemic risk as default risk is transmitted to banks, the primary holders of local debt. Using a Dynamic Stochastic General Equilibrium model incorporating local governments and banks, we show that local debt expansion increases banks' nonperforming loans and crowds out private credit, increasing bank risk-taking. We empirically examine 2010–2019 data on 350 Chinese banks and find that the level of local debt positively impacts bank risk-taking, especially low-capital, nonstate, and unlisted banks. The mechanisms operate through an increase in nonperforming loans due to default risk and a reduced regional repayment capacity due to crowded-out private credit. Our study reveals the impact of local debt on bank risk and financial stability in China. Policy implications include strengthening bank regulation and pursuing diversified government financing.

Suggested Citation

  • Zhu, Jun & Zhu, Man & Yang, Zhiwei, 2024. "The financialization of local government debt in China and its risk transmission to commercial banks," Economic Modelling, Elsevier, vol. 133(C).
    • Handle: RePEc:eee:ecmode:v:133:y:2024:i:c:s0264999324000439
    DOI: 10.1016/j.econmod.2024.106687
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999324000439
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2024.106687?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Local government debt; Commercial banks; Bank risk-taking; Financial risk;
    All these keywords.

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:133:y:2024:i:c:s0264999324000439. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.