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The crowding out effect of central versus local government debt: Evidence from China

Man Zhang, Oscar T. Brookins and Xiaowei Huang

Pacific-Basin Finance Journal, 2022, vol. 72, issue C

Abstract: We empirically investigate the impacts of central government debt and local government debt on corporate debt in the Chinese domestic financial market during 2008–2019. We find that both central government debt and local government debt are negatively related to corporate debt. Central government debt affects corporate debt by crowding out corporate bonds, which we refer to as the safety crowding-out effect and consistent with literature findings. Local government debt affects corporate debt by crowding out corporate loans, referred to as the financial crowding-out effect. We also identify the mechanisms behind the financial crowding-out effect through the banks' asset portfolio and thickness of the lending market. We confirm the mechanism by examining how the heterogeneity of local government health, government debt risk, and firms' characteristics affect the financial crowding-out effect.

Keywords: Crowding-out effect; Treasury bonds; LGFV bonds; Corporate debt leverage (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.pacfin.2022.101707

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Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

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Handle: RePEc:eee:pacfin:v:72:y:2022:i:c:s0927538x22000026