IDEAS home Printed from https://ideas.repec.org/a/eee/regeco/v98y2023ics0166046222000977.html

Understanding local government debt in China: A regional competition perspective

Author

Listed:
  • Qu, Xi
  • Xu, Zhiwei
  • Yu, Jinxiang
  • Zhu, Jun

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.

Suggested Citation

  • Qu, Xi & Xu, Zhiwei & Yu, Jinxiang & Zhu, Jun, 2023. "Understanding local government debt in China: A regional competition perspective," Regional Science and Urban Economics, Elsevier, vol. 98(C).
    • Handle: RePEc:eee:regeco:v:98:y:2023:i:c:s0166046222000977
    DOI: 10.1016/j.regsciurbeco.2022.103859
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0166046222000977
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.regsciurbeco.2022.103859?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. 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.
    2. Chen, Ye & Li, Hongbin & Zhou, Li-An, 2005. "Relative performance evaluation and the turnover of provincial leaders in China," Economics Letters, Elsevier, vol. 88(3), pages 421-425, September.
    3. Junyan Jiang, 2018. "Making Bureaucracy Work: Patronage Networks, Performance Incentives, and Economic Development in China," American Journal of Political Science, John Wiley & Sons, vol. 62(4), pages 982-999, October.
    4. Jun Zhang, 2012. "Zhu Rongji Might Be Right: Understanding the Mechanism of Fast Economic Development in China," The World Economy, Wiley Blackwell, vol. 35(12), pages 1712-1732, December.
    5. Lin William Cong & Haoyu Gao & Jacopo Ponticelli & Xiaoguang Yang, 2019. "Credit Allocation Under Economic Stimulus: Evidence from China," The Review of Financial Studies, Society for Financial Studies, vol. 32(9), pages 3412-3460.
    6. Ms. Yuanyan S Zhang & Mr. Steven A Barnett, 2014. "Fiscal Vulnerabilities and Risks from Local Government Finance in China," IMF Working Papers 2014/004, International Monetary Fund.
    7. Eberhardt, Markus & Presbitero, Andrea F., 2015. "Public debt and growth: Heterogeneity and non-linearity," Journal of International Economics, Elsevier, vol. 97(1), pages 45-58.
    8. Gao, Haoyu & Ru, Hong & Tang, Dragon Yongjun, 2021. "Subnational debt of China: The politics-finance nexus," Journal of Financial Economics, Elsevier, vol. 141(3), pages 881-895.
    9. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-1162, December.
    10. Checherita-Westphal, Cristina & Rother, Philipp, 2012. "The impact of high government debt on economic growth and its channels: An empirical investigation for the euro area," European Economic Review, Elsevier, vol. 56(7), pages 1392-1405.
    11. Yingyi Qian & Barry R. Weingast, 1997. "Federalism as a Commitment to Reserving Market Incentives," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 83-92, Fall.
    12. Wu, Yanrui, 2014. "Local government debt and economic growth in China," BOFIT Discussion Papers 20/2014, Bank of Finland Institute for Emerging Economies (BOFIT).
    13. Wei Xiong, 2018. "The Mandarin Model of Growth," NBER Working Papers 25296, National Bureau of Economic Research, Inc.
    14. Yingyi Qian & Barry R. Weingast, 1996. "China's transition to markets: market-preserving federalism, chinese style," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 1(2), pages 149-185.
    15. Hong Ru, 2018. "Government Credit, a Double†Edged Sword: Evidence from the China Development Bank," Journal of Finance, American Finance Association, vol. 73(1), pages 275-316, February.
    16. Jin, Hehui & Qian, Yingyi & Weingast, Barry R., 2005. "Regional decentralization and fiscal incentives: Federalism, Chinese style," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1719-1742, September.
    17. Qian, Yingyi, 2017. "How Reform Worked in China: The Transition from Plan to Market," MIT Press Books, The MIT Press, edition 1, volume 1, number 026253424x, December.
    18. Yi Huang & Marco Pagano & Ugo Panizza, 2020. "Local Crowding‐Out in China," Journal of Finance, American Finance Association, vol. 75(6), pages 2855-2898, December.
    19. Yu, Jihai & Zhou, Li-An & Zhu, Guozhong, 2016. "Strategic interaction in political competition: Evidence from spatial effects across Chinese cities," Regional Science and Urban Economics, Elsevier, vol. 57(C), pages 23-37.
    20. Jiang, Junyan & Zhang, Muyang, 2020. "Friends with benefits: Patronage networks and distributive politics in China," Journal of Public Economics, Elsevier, vol. 184(C).
    21. Li, Hongbin & Zhou, Li-An, 2005. "Political turnover and economic performance: the incentive role of personnel control in China," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1743-1762, September.
    22. Ruixue Jia & Masayuki Kudamatsu & David Seim, 2015. "Political Selection In China: The Complementary Roles Of Connections And Performance," Journal of the European Economic Association, European Economic Association, vol. 13(4), pages 631-668, August.
    23. Ming Lu & Huiyong Zhong, 2018. "Eurozonization of the Chinese Economy: How Do Intergovernmental Transfers Affect Local Government Debt in China?," Asian Economic Papers, MIT Press, vol. 17(1), pages 1-18, Winter/Sp.
    24. Yanrui Wu, 2020. "Local Government Debt And Economic Growth In China," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 18(3), pages 229-242, July.
    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. Qu, Xi & Xu, Zhiwei & Yu, Jinxiang, 2025. "The pricing of local government bonds in China: A bank-government relationship perspective," China Economic Review, Elsevier, vol. 93(C).
    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. Gao, Haoyu & Ru, Hong & Tang, Dragon Yongjun, 2021. "Subnational debt of China: The politics-finance nexus," Journal of Financial Economics, Elsevier, vol. 141(3), pages 881-895.
    4. Ke Mao & Pierre Failler, 2022. "Local Government Debt and Green Total Factor Productivity—Empirical Evidence from Chinese Cities," IJERPH, MDPI, vol. 19(19), pages 1-13, September.
    5. Li, Runheng & Tang, Yao & Weng, Xi & Zhou, Li-An, 2026. "Political Accountability and Local Government Debt: Evidence from China," MPRA Paper 128626, University Library of Munich, Germany.
    6. Yang Shen & Jing Wu & Shuping Wu, 2022. "City‐chief turnover and place‐based policy change: Evidence from China," Journal of Regional Science, Wiley Blackwell, vol. 62(5), pages 1296-1328, November.
    7. Han Gao & Minming Lan & Jie Li & Tianhang Zhou, 2024. "Economic policy uncertainty and local government debt: Evidence from China," Kyklos, Wiley Blackwell, vol. 77(4), pages 1103-1141, November.
    8. Chen, Bochao & Wang, Hang & Wang, Xianbin, 2024. "Innovation Like China: Evidence from Chinese Local Officials' Promotions," China Economic Review, Elsevier, vol. 86(C).
    9. Deng, Jiapin & Liu, Qiao, 2024. "Good finance, bad finance, and resource misallocation: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 159(C).
    10. Yi Huang & Marco Pagano & Ugo Panizza, 2020. "Local Crowding‐Out in China," Journal of Finance, American Finance Association, vol. 75(6), pages 2855-2898, December.
    11. Mengkai Chen & Ting Chen & Debao Ruan & Xiaowei Wang, 2023. "Land Finance, Real Estate Market, and Local Government Debt Risk: Evidence from China," Land, MDPI, vol. 12(8), pages 1-18, August.
    12. Chen, Shawn Xiaoguang & Liu, Yong & Xu, Xianxiang, 2020. "Dynamics of Local Cadre Appointment in China," China Economic Review, Elsevier, vol. 64(C).
    13. Tianchu Feng & Meijuan Liu & Chaozhu Li, 2022. "How Does Vertical Fiscal Imbalance Affect CO 2 Emissions? The Role of Capital Mismatch," Sustainability, MDPI, vol. 14(17), pages 1-15, August.
    14. Xie, Hongji & Tian, Cunzhi & Wu, Yuanlin, 2024. "Quid pro quo? Local government debt and corporate tax avoidance," The British Accounting Review, Elsevier, vol. 56(5).
    15. Chen, Shuo & Qiao, Xue & Zhu, Zhitao, 2021. "Chasing or cheating? Theory and evidence on China's GDP manipulation," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 657-671.
    16. Chen, Suyun & Li, Zongze & Xie, Feixue & Xu, Xiaofang, 2024. "The signaling effect of local government debt: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    17. Tinglin Zhang & Bindong Sun & Yinyin Cai & Rui Wang, 2019. "Government fragmentation and economic growth in China’s cities," Urban Studies, Urban Studies Journal Limited, vol. 56(9), pages 1850-1864, July.
    18. Wang, He & Yao, Yang & Zhou, Yue, 2022. "Markets price politicians: Evidence from China’s municipal bond markets," Journal of Economics and Business, Elsevier, vol. 122(C).
    19. Fan, Jianyong & Liu, Yu & Zhang, Qi & Zhao, Peng, 2022. "Does government debt impede firm innovation? Evidence from the rise of LGFVs in China," Journal of Banking & Finance, Elsevier, vol. 138(C).
    20. Chuantao Cui & Leona Shao-Zhi Li, 2024. "More but not better: Career incentives of local leaders and entrepreneurial entry in China," Working Papers 202417, University of Macau, Faculty of Business Administration.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    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:regeco:v:98:y:2023:i:c:s0166046222000977. 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/regec .

    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.