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Investing like conglomerates: is diversification a blessing or curse for China's local governments?

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  • Jianchao Fan
  • Jing Liu
  • Yinggang Zhou

Abstract

This paper examines how China's local governments make investment via financing vehicles (LGFVs) and provides new insights on often-criticised LGFVs from a different perspective. Using data for 4,432 LGFVs from 1,225 counties across China between 2005 and 2018, we show that since 2014, the function of LGFVs has changed from financing conduits to conglomerate platforms with more diversified investments. While a certain level of diversification can be a blessing for local economic growth, over-diversification is a curse. Such an inverted U-shaped relationship depends on the condition of the local economy. Over-diversification may lead to rising local debt and crowding-out effects on private investment.

Suggested Citation

  • Jianchao Fan & Jing Liu & Yinggang Zhou, 2021. "Investing like conglomerates: is diversification a blessing or curse for China's local governments?," BIS Working Papers 920, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:920
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    References listed on IDEAS

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    More about this item

    Keywords

    local government financing vehicle; diversified investment; government debt; conglomerate;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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