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Spillover effect of local government debt on regional financial risk: Evidence from China

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  • Xu, Lingjuan
  • Liu, Yijiang
  • Li, Xintong
  • Zhang, Xuan

Abstract

Developing countries' debt problems, which can spill over into the financial system, are a growing international concern. We use a comprehensive debt risk index and dynamic spatial Durbin model over 31 provinces during 2015–2022 in China to provide empirical evidence on spillovers between local government debt and regional financial risk. We find local government debt exacerbates regional financial risk both directly within regions and via spatial spillovers to neighboring areas, with direct effects stronger in less financially developed regions and spillovers more significant in eastern areas. Traditional and new infrastructure investment mediates this transmission, suggesting policymakers should implement differentiated debt management strategies that account for regional financial development levels and strengthen inter-regional coordination to mitigate cross-border financial contagion.

Suggested Citation

  • Xu, Lingjuan & Liu, Yijiang & Li, Xintong & Zhang, Xuan, 2026. "Spillover effect of local government debt on regional financial risk: Evidence from China," Finance Research Letters, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finlet:v:87:y:2026:i:c:s1544612325021579
    DOI: 10.1016/j.frl.2025.108904
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