Regulating local government debt in China: Intended and unintended consequences

Author:

You Yu1ORCID

Affiliation:

1. Xiamen University

Abstract

This study integrates institutional and empirical analyses to investigate the intricate policies that regulate local government debt in China. It finds that, within a remarkably short period, China has skilfully incorporated local government debt into the local budget management system, thereby transforming it from a mere transaction between local governments and credit agencies to an intergovernmental fiscal relations framework. The study also establishes that the pivotal debt-regulating policies are more geared towards prioritizing the cost of debt over its scale. Official documents, statistical data, and in-depth interviews provide evidence to support these findings. Drawing on an analysis of county-level panel data in Sichuan Province, this study identifies two main effects of these policies. Primarily, the cost of local general debt may trigger the notorious soft budget constraint, thereby incentivizing county-level governments to depend more heavily on superior transfer payments. Additionally, the fiscal consolidation policy, which focuses on the cost of local special debt, may lower the debt ratio. However, it also has the unintended consequence of bolstering the local government’s reliance on land finance.

Publisher

SAGE Publications

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