IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v82y2025ics1544612325008311.html

Geopolitical shock and local government debt risk

Author

Listed:
  • Feng, Dongfa
  • Lu, Ziteng
  • Tang, Wei
  • Zhang, Yao

Abstract

Frequent geopolitical shock threatens global financial stability and may trigger local government debt risk, yet its causal link remains poorly understood. Using the Russia-Ukraine conflict as a quasi-exogenous shock to pro-Russian regions, we analyze a balanced panel of 2755 Chinese counties from 2016 to 2023 with a difference-in-differences approach. Our results show that geopolitical shock significantly increases local government debt risk. Mechanism analysis suggests this effect operates by reshaping economic development patterns, weakening fiscal capacity, and raising debt costs. Heterogeneity analysis indicates the impact is more pronounced in regions with closer ties to Russia, greater reliance on land finance, higher implicit debt ratios, and higher marketization. These findings enrich our understanding of the economic consequences of geopolitical shock and offer policy insights for managing local government debt risk amid external shocks.

Suggested Citation

  • Feng, Dongfa & Lu, Ziteng & Tang, Wei & Zhang, Yao, 2025. "Geopolitical shock and local government debt risk," Finance Research Letters, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:finlet:v:82:y:2025:i:c:s1544612325008311
    DOI: 10.1016/j.frl.2025.107572
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612325008311
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2025.107572?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

    for a different version of it.

    References listed on IDEAS

    as
    1. Dario Caldara & Matteo Iacoviello, 2022. "Measuring Geopolitical Risk," American Economic Review, American Economic Association, vol. 112(4), pages 1194-1225, April.
    2. Chen, Zhuo & He, Zhiguo & Liu, Chun, 2020. "The financing of local government in China: Stimulus loan wanes and shadow banking waxes," Journal of Financial Economics, Elsevier, vol. 137(1), pages 42-71.
    3. Yilmazkuday, Hakan, 2025. "Geopolitical risks and exchange rates," Finance Research Letters, Elsevier, vol. 74(C).
    4. Ashesh Rambachan & Jonathan Roth, 2023. "A More Credible Approach to Parallel Trends," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(5), pages 2555-2591.
    5. Vasily Korovkin & Alexey Makarin, 2023. "Conflict and Intergroup Trade: Evidence from the 2014 Russia-Ukraine Crisis," American Economic Review, American Economic Association, vol. 113(1), pages 34-70, January.
    6. Zhang, Mengtao & Chen, Wenchuan & Kou, Aidi & Wu, Yanjun, 2023. "Promotion incentives, tenure uncertainty, and local government debt risk," Finance Research Letters, Elsevier, vol. 56(C).
    7. Xue, Wenjun & Yilmazkuday, Hakan & Taylor, Jason E., 2020. "The impact of China’s fiscal and monetary policy responses to the great recession: An analysis of firm-level Chinese data," Journal of International Money and Finance, Elsevier, vol. 101(C).
    8. Hakan Yilmazkuday, 2025. "Geopolitical risks and cryptocurrency returns," Review of Financial Economics, John Wiley & Sons, vol. 43(2), pages 166-191, April.
    9. Yilmazkuday, Hakan, 2024. "Geopolitical risk and stock prices," European Journal of Political Economy, Elsevier, vol. 83(C).
    10. Glambosky, Mina & Peterburgsky, Stanley, 2022. "Corporate activism during the 2022 Russian invasion of Ukraine," Economics Letters, Elsevier, vol. 217(C).
    11. Zhang, Jinjin & Liu, Jin & Zhou, Gang & Pan, Di & Liao, Fang-nan, 2024. "Has inspection supervision effectively reduced the risk of local government debt? Evidence from China," Finance Research Letters, Elsevier, vol. 60(C).
    12. Mo, Jiawei, 2018. "Land financing and economic growth: Evidence from Chinese counties," China Economic Review, Elsevier, vol. 50(C), pages 218-239.
    13. Li, Yulong, 2024. "The nexus between local government debt risk, real estate sector, and financial stability," Finance Research Letters, Elsevier, vol. 69(PA).
    14. Timothy Besley & Torsten Persson, 2008. "Wars and State Capacity," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 522-530, 04-05.
    15. Shu, Cheng & Xie, Hualin & Jiang, Jinfa & Chen, Qianru, 2018. "Is Urban Land Development Driven by Economic Development or Fiscal Revenue Stimuli in China?," Land Use Policy, Elsevier, vol. 77(C), pages 107-115.
    16. Grira, Jocelyn, 2020. "Back to government ownership: The Sovereign Wealth Funds phenomenon," Finance Research Letters, Elsevier, vol. 34(C).
    17. de Mello, Luiz Jr, 2000. "Fiscal Decentralization and Intergovernmental Fiscal Relations: A Cross-Country Analysis," World Development, Elsevier, vol. 28(2), pages 365-380, February.
    18. Kunyu Tao, 2015. "Assessing Local Government Debt Risks in China: A Case Study of Local Government Financial Vehicles," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 23(5), pages 1-25, September.
    19. Xinjie Wang & Yangru Wu & Weike Xu, 2024. "Geopolitical Risk and Investment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(8), pages 2023-2059, December.
    20. Lin, Xiaowei & Chen, Sicen & Cheng, Xin & Wang, Jinmei, 2022. "Local government audit and municipal debt risk: Evidence from audit reform in China," Finance Research Letters, Elsevier, vol. 50(C).
    21. Yilmazkuday, Hakan, 2024. "Geopolitical risks and energy uncertainty: Implications for global and domestic energy prices," Energy Economics, Elsevier, vol. 140(C).
    22. Gang Guo, 2009. "China's Local Political Budget Cycles," American Journal of Political Science, John Wiley & Sons, vol. 53(3), pages 621-632, July.
    23. Chang-Tai Hsieh & Peter J. Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(4), pages 1403-1448.
    24. Omid Asadollah & Linda Schwartz Carmy & Md. Rezwanul Hoque & Hakan Yilmazkuday, 2024. "Geopolitical risk, supply chains, and global inflation," The World Economy, Wiley Blackwell, vol. 47(8), pages 3450-3486, August.
    25. Nguyen, Xuan Thang & Nguyen, Thanh Cong & Hoang, Huy Viet, 2025. "Geopolitical risk and corporate investment efficiency," Finance Research Letters, Elsevier, vol. 78(C).
    26. Walker, Thomas & Zhang, Xueying & Zhang, Aoran & Wang, Yulin, 2021. "Fact or fiction: Implicit government guarantees in China’s corporate bond market," Journal of International Money and Finance, Elsevier, vol. 116(C).
    27. Zhao, Shikuan & Abbassi, Wajih & Hunjra, Ahmed Imran & Zhang, Han, 2024. "How do government R&D subsidies affect corporate green innovation choices? Perspectives from strategic and substantive innovation," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1378-1396.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mitra, Gaurav & Gupta, Vandana & Gupta, Gaurav, 2025. "Global uncertainties and performance of Indian firms: A comparative study of geopolitical risk and economic policy uncertainty," Finance Research Letters, Elsevier, vol. 86(PA).
    2. Wan, Xihong & Guo, Min & Jiang, Ping & Xu, Lei, 2025. "Government accounting reform, fiscal transparency, and local government debts: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 91(C).
    3. Lai, Fujun & Wang, Fuxiang & Li, Yunzhong & Shum, Wai Yan, 2025. "Global geopolitical risk and stock price informativeness," Economic Analysis and Policy, Elsevier, vol. 87(C), pages 2279-2297.
    4. Bao, Helen X.H. & Wang, Ziyou & Wu, Robert Liangqi, 2024. "Understanding local government debt financing of infrastructure projects in China: Evidence based on accounting data from local government financing vehicles," Land Use Policy, Elsevier, vol. 136(C).
    5. Zhang, Mengtao & Chen, Wenchuan & Kou, Aidi & Wu, Yanjun, 2023. "Promotion incentives, tenure uncertainty, and local government debt risk," Finance Research Letters, Elsevier, vol. 56(C).
    6. Zhou, Youcheng & Li, Bingchen & Zhao, Mengqi, 2025. "Asymmetric association between supply chain bottlenecks and consumer energy prices: Evidence from quantile-on-quantile approach," Energy Economics, Elsevier, vol. 147(C).
    7. Abakah, Emmanuel Joel Aikins & Abdullah, Mohammad & Akinsomi, Omokolade & Tiwari, Aviral Kumar, 2025. "Geopolitical risk and real estate stock crash," Finance Research Letters, Elsevier, vol. 80(C).
    8. Alam, Khandaker Jahangir & Nakhaee, Aida Ashtari & Yilmazkuday, Hakan, 2025. "Energy security and economic growth: The role of geopolitical tensions," Energy, Elsevier, vol. 341(C).
    9. Lu, Dong & Tang, Huoqing & Zhang, Chengsi, 2023. "China's monetary policy surprises and corporate real investment," China Economic Review, Elsevier, vol. 77(C).
    10. Xiong, Ding & Sun, Yao, 2025. "The rising cost of turmoil: geopolitical crises and supply chain risk," Economics Letters, Elsevier, vol. 255(C).
    11. Fengxia Hao & Yuqin Wang & Yong Li, 2026. "From complexity to resilience: the role of regional knowledge in reducing China’s local government debt risk," Economics of Governance, Springer, vol. 27(1), pages 1-28, December.
    12. Cao, Ngan Duong & Trinh, Vu Quang & Nguyen, Tam Duc, 2025. "Geopolitical uncertainty and firm tail risk: Evidence from energy-focused economies," Energy Economics, Elsevier, vol. 150(C).
    13. Xiao, Zeliang & Zhang, Houli, 2025. "Real estate market regulation and local government debt risk," Finance Research Letters, Elsevier, vol. 80(C).
    14. Zhang, Jingting & Zeng, Junping, 2025. "Whac-a-mole: China's debt policies and local debt risks," Pacific-Basin Finance Journal, Elsevier, vol. 94(C).
    15. Li Dai & Yuqi Yang & Yifan Bao & Zongze Li, 2024. "Impact of Local Government Debt on Regional Innovation and Entrepreneurship: Evidence from China," SAGE Open, , vol. 14(4), pages 21582440241, October.
    16. Yilmazkuday, Hakan, 2025. "Geopolitical risks and exchange rates," Finance Research Letters, Elsevier, vol. 74(C).
    17. Zhou, Zhiping & Wang, Kai, 2025. "War discourse predicts stock market volatility: A century of evidence," Finance Research Letters, Elsevier, vol. 82(C).
    18. Nguyen, Dinh Trung, 2025. "Geopolitical risks and crypto exchange rate premium: Implications for capital flight," Finance Research Letters, Elsevier, vol. 85(PE).
    19. Hu, Yushan & Zhang, Penglong, 2024. "International exposure and the transmission of financial shocks: Evidence from China," Journal of International Money and Finance, Elsevier, vol. 149(C).
    20. Ha, Le Thanh, 2025. "From wars to dynamic waves: Scrutinizing connectedness between geopolitical risk index, green and non-green crypto volatility by quantile spillovers," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 679(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War

    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:finlet:v:82:y:2025:i:c:s1544612325008311. 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.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with 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/frl .

    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.