ANALYSIS OF THE CO-MOVEMENT BETWEEN LOCAL GOVERNMENT DEBT RISK AND BANK RISK IN CHINA

Changjun Zheng, Siwei Huang and Ningyu Qian
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Changjun Zheng: School of Management, Huazhong University of Science and Technology, Wuhan 430074, P. R. China
Siwei Huang: School of Management, Huazhong University of Science and Technology, Wuhan 430074, P. R. China
Ningyu Qian: School of Management, Huazhong University of Science and Technology, Wuhan 430074, P. R. China

The Singapore Economic Review (SER), 2021, vol. 66, issue 03, 807-835

Abstract: We characterize the debt risk and bank risk of local governments in China with a dynamic factor model that decomposes 31 provincial data of China into country, regional, and idiosyncratic components. The result shows the presence of co-movement between local government debt risk and bank risk. The country, regional, and province factors explain 62%, 16%, and 22% of local government debt risk, respectively, and 28%, 8%, and 64% of commercial bank risk, respectively. Sub-sample analysis reveals that the country factor has become less volatile and its importance typically increases across all provinces after the reform of local government debt financing pattern (e.g., the introduction of Document No. 43).

Keywords: Local government debt risk; bank risk; dynamic factor model (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S0217590819500632

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