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Implicit guarantee expectations and regional financial risks: a counterfactual estimation perspective based on municipal bonds

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  • Qingjun Zhang

    (Tianjin University of Finance and Economics
    Tianjin University of Finance and Economics)

  • Zhishang Zhao

    (Tianjin University of Finance and Economics)

  • Sijia Fan

    (London School of Economics and Political Science)

Abstract

An implicit guarantee relationship exists between local governments and urban investment platforms. This market expectation has existed for a considerable period of time and has become a market belief, which has resulted in a certain degree of interference in the prevention and resolution of debt risks. In light of the pervasive expectation among investors of implicit guarantees for municipal investment platforms, this study employs panel data from prefecture-level and above cities between 2010 and 2021 to assess the influence of implicit guarantees for municipal investment bonds on regional financial risks and its underlying mechanism. The study finds that the implicit guarantee of municipal investment bonds will, to some extent, increase the potential for financial risk. The mechanism analysis indicates that the implicit guarantee of municipal investment bonds may exert an influence on regional financial risk through two principal channels: firstly, the “private-government” investment crowding-out substitution effect and secondly, the “constraint-diffusion” of debt scale. Further analysis reveals that the implicit guarantee of municipal investment bonds gives rise to a certain degree of contagious risk and heterogeneity. Concurrently, the creation of new avenues for addressing the existing debt burden and the prevention of further debt accumulation can assist in mitigating the regional financial risks associated with the implicit guarantee of municipal investment bonds. The findings of this study provide substantial support for the policy approach of challenging the assumption of underwriting and offer a crucial insight into enhancing market guidance and improving the long-term framework for local debt management.

Suggested Citation

  • Qingjun Zhang & Zhishang Zhao & Sijia Fan, 2025. "Implicit guarantee expectations and regional financial risks: a counterfactual estimation perspective based on municipal bonds," Economic Change and Restructuring, Springer, vol. 58(2), pages 1-40, April.
    • Handle: RePEc:kap:ecopln:v:58:y:2025:i:2:d:10.1007_s10644-025-09873-4
    DOI: 10.1007/s10644-025-09873-4
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