Subnational debt of China: The politics-finance nexus

Haoyu Gao, Hong Ru and Dragon Yongjun Tang

Journal of Financial Economics, 2021, vol. 141, issue 3, 881-895

Abstract: We provide direct evidence that governments selectively default on debt when they can identify creditors. Analyzing a comprehensive data set of subnational debt, we show that Chinese local governments choose to default on banks with weaker political power. A reduction in a bank's political power relative to other banks increases the likelihood of selective default by local governments. Such default selections are driven by banks’ influence over politician promotion. When local politicians are highly ranked or connected to national leaders, they engage less in selective default as their promotion is less affected by bank loan defaults. Our findings suggest a politics-finance nexus through which government defaults are restrained.

Keywords: Government debt; Selective default; Politics-finance nexus; Career concern (search for similar items in EconPapers)
JEL-codes: D72 G21 G32 H74 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:141:y:2021:i:3:p:881-895

DOI: 10.1016/j.jfineco.2021.05.028

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