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The Financing of Local Government in the People’s Republic of China: Stimulus Loan Wanes and Shadow Banking Waxes

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  • Chen, Zhuo

    (Asian Development Bank Institute)

  • He, Zhiguo

    (Asian Development Bank Institute)

  • Liu, Chun

    (Asian Development Bank Institute)

Abstract

The People’s Republic of China (PRC)’s four-trillion-yuan stimulus package fueled by bank loans in 2009 has led to the rapid growth of shadow banking activities in the PRC after 2012. The local governments in the PRC financed the stimulus plan mainly through bank loans in 2009, and resorted to non-bank debt financing after 2012 given the mounting rollover pressure from bank debt coming due, a manifestation of the stimulus loan-hangover effect. Cross-sectionally, provinces with abnormally greater bank loan growth in 2009 experienced more Municipal Corporate Bonds issuance during 2012-2015, as well as more shadow banking activities including entrusted loans and wealth management products. We highlight the market forces behind the regulation changes on local government debt post 2012, together with the expedited reform on interest rate liberalization during that period.

Suggested Citation

  • Chen, Zhuo & He, Zhiguo & Liu, Chun, 2018. "The Financing of Local Government in the People’s Republic of China: Stimulus Loan Wanes and Shadow Banking Waxes," ADBI Working Papers 800, Asian Development Bank Institute.
  • Handle: RePEc:ris:adbiwp:0800
    as

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    References listed on IDEAS

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    1. Yi Huang & Marco Pagano & Ugo Panizza, 2016. "Public Debt and Private Firm Funding: Evidence from Chinese Cities," IHEID Working Papers 10-2016, Economics Section, The Graduate Institute of International Studies, revised Aug 2016.
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    3. Douglas W. Diamond & Zhiguo He, 2014. "A Theory of Debt Maturity: The Long and Short of Debt Overhang," Journal of Finance, American Finance Association, vol. 69(2), pages 719-762, April.
    4. Zhiguo He & Wei Xiong, 2012. "Rollover Risk and Credit Risk," Journal of Finance, American Finance Association, vol. 67(2), pages 391-430, April.
    5. Chong-En Bai & Chang-Tai Hsieh & Zheng Michael Song, 2016. "The Long Shadow of a Fiscal Expansion," NBER Working Papers 22801, National Bureau of Economic Research, Inc.
    6. Douglas W. Diamond, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 709-737.
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    8. Tao Zha & Jue Ren & Kaiji Chen, 2016. "What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending," 2016 Meeting Papers 82, Society for Economic Dynamics.
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    12. Yuanyan S Zhang & Steven A Barnett, 2014. "Fiscal Vulnerabilities and Risks from Local Government Finance in China," IMF Working Papers 14/4, International Monetary Fund.
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    1. repec:pal:compes:v:61:y:2019:i:3:d:10.1057_s41294-019-00099-8 is not listed on IDEAS

    More about this item

    Keywords

    local government financing vehicles; municipal corporate bonds; shadow banking in china;

    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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