Fiscal self‐sufficiency, debt policy, and long‐term sustainability in China's emerging local bond market

Abstract

AbstractUsing panel data from 155 Chinese provincial‐level governments between 2015 and 2020, this study develops fiscal indicators to measure the sustainability of China's bond market given its institutional context. With these indicators, the research empirically explores the effect of fiscal institutions such as centrally‐imposed debt limits on local governments' debt sustainability. It also investigates the capacity of local governments for self‐sufficiency to meet their debt obligations and maintain long‐term sustainability. We find that debt limits have promoted local debt sustainability while local fiscal self‐sufficiency has had little effect on debt sustainability in the long‐term. The findings provide public finance and policy scholars with an understanding of the effectiveness of fiscal institutions such as debt limits imposed by China's central government.