Fear of war: Geopolitical risks and the potential impact on local government bonds, stock market and FDI in China

Daoping Wang, Kangle Li and Xinyan Shen

Economics Letters, 2025, vol. 251, issue C

Abstract: This study investigates the impact of Taiwan Strait-related geopolitical risk on local government bonds, stock market and FDI in the Chinese mainland. Using data from 10,983 bonds, we find that increased geopolitical risks are associated with higher credit spreads. Provinces with higher FDI and greater foreign trade dependence, short-term bonds, and secondary market trading are more strongly affected. A case study demonstrates that geopolitical risk has an immediate and persistent impact on spreads, peaking within one month and gradually declining afterward. Moreover, heightened geopolitical risk negatively affects provincial FDI inflows and the stock returns of state-owned enterprises.

Keywords: Geopolitical risk; Local government bonds; Stock market; FDI (search for similar items in EconPapers)
JEL-codes: E44 F50 G12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:251:y:2025:i:c:s0165176525001661

DOI: 10.1016/j.econlet.2025.112329

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