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Business environment and its impact on local government financing costs: evidence from the credit spread of municipal corporate bonds in China

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  • Chuntao Li
  • Yige Xie
  • Yi Zhao

Abstract

This study explores the relationship between business environment and the financing costs of Chinese local governments, measured by the credit spread of municipal corporate bonds (MCBs) from 2015 to 2021. We use the provincial business environment and find that a favourable business environment significantly reduces MCBs’ credit spread. Additionally, we use a unique instrument, the crop over-reporting ratio from the Great Leap Forward (GLF) era, to address endogeneity concerns. Mechanism analysis suggests that lower local government leverage and improved information transparency drive this effect. Moreover, this relationship exhibits heterogeneity in regional and LGFVs characteristics. Overall, our study highlights that the business environment can significantly influence local government financing, with long-term policy implications for China’s ongoing development.

Suggested Citation

  • Chuntao Li & Yige Xie & Yi Zhao, 2026. "Business environment and its impact on local government financing costs: evidence from the credit spread of municipal corporate bonds in China," Applied Economics, Taylor & Francis Journals, vol. 58(15), pages 2875-2890, March.
    • Handle: RePEc:taf:applec:v:58:y:2026:i:15:p:2875-2890
    DOI: 10.1080/00036846.2025.2482240
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