Geopolitical shock and local government debt risk

Dongfa Feng, Ziteng Lu, Wei Tang and Yao Zhang

Finance Research Letters, 2025, vol. 82, issue C

Abstract: Frequent geopolitical shock threatens global financial stability and may trigger local government debt risk, yet its causal link remains poorly understood. Using the Russia-Ukraine conflict as a quasi-exogenous shock to pro-Russian regions, we analyze a balanced panel of 2755 Chinese counties from 2016 to 2023 with a difference-in-differences approach. Our results show that geopolitical shock significantly increases local government debt risk. Mechanism analysis suggests this effect operates by reshaping economic development patterns, weakening fiscal capacity, and raising debt costs. Heterogeneity analysis indicates the impact is more pronounced in regions with closer ties to Russia, greater reliance on land finance, higher implicit debt ratios, and higher marketization. These findings enrich our understanding of the economic consequences of geopolitical shock and offer policy insights for managing local government debt risk amid external shocks.

Keywords: Geopolitical shock; Local government debt risk; Russia-Ukraine conflict; Fiscal capacity; Debt costs (search for similar items in EconPapers)
JEL-codes: F51 H56 H63 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:82:y:2025:i:c:s1544612325008311

DOI: 10.1016/j.frl.2025.107572

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