Eurozonization of the Chinese Economy: How Do Intergovernmental Transfers Affect Local Government Debt in China?

Ming Lu and Huiyong Zhong
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Ming Lu: Antai College of Economics and Management Shanghai Jiaotong University No. 1954, Huashan Road, Xuhui District Shanghai, China Author email: luming1973@sjtu.edu.cn
Huiyong Zhong: School of Finance Shanghai University of International Business and Economics No. 1900, Wenxiang Road, Songjiang District Shanghai, China Author email: zhonghuiyong@gmail.com

Asian Economic Papers, 2018, vol. 17, issue 1, 1-18

Abstract: China's local government debt has risen dramatically bringing risks to China's fiscal sustainability and long term economic growth. Using urban construction investment bonds (UCIBs) issued by local government financing vehicles (LGFVs), we study how intergovernmental fiscal transfers impact the issuance of UCIBs under China's unitary currency system. Applying instrumental variable estimation, we find that special-purpose fiscal transfers per capita are positively associated with the issuance of UCIBs. A one-RMB increase in special-purpose fiscal transfers per capita is associated with an increase in the issuance of UCIBs per capita of 0.282 RMB, whereas regular fiscal transfers (including tax rebates and general fiscal transfers) do not affect the issuance of UCIBs. Furthermore, the effect of special-purpose fiscal transfers on the issuance of UCIBs mainly exists in inland cities rather than coastal cities. This imposes risks of “eurozonization” for the Chinese economy. We also find a deterioration of refinancing in terms of issuing more UCIBs.

Date: 2018
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