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Leverage of Local State-Owned Enterprises, Implicit Contingent Liabilities of Government and Economic Growth

Yixuan Duan, Min Guo and Yixuan Huang
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Yixuan Duan: School of Economics and Management, China University of Petroleum, Beijing 102249, China
Min Guo: School of Banking & Finance, University of International Business and Economics, Beijing 100029, China
Yixuan Huang: Research Center for Finance, Chinese Academy of Fiscal Sciences, Beijing 100142, China

Sustainability, 2022, vol. 14, issue 6, 1-23

Abstract: Local state-owned enterprises (SOEs) working together with local governments can promote economic growth. However, an increase in the implicit contingent liabilities of local governments due to implicit guarantees given to SOEs has a negative effect on economic growth. The classical socialist theories and the economic stability in each financial crisis of China show that the macroeconomic efficiency of SOEs is more important than the microeconomic efficiency, and microeconomic efficiency in neoclassical economic theory cannot reflect the nature of SOEs. It is of great practical and theoretical significance to make a more comprehensive and accurate judgment on the efficiency of SOEs. This paper constructs an index of local governments’ implicit contingent liabilities in 31 provinces based on the 488 local SOEs to study the impact of implicit contingent liabilities, and the time period is the year 2007 to the year 2020. Our findings show that an increase in local SOEs’ assets suppresses economic fluctuations at the cost of increasing government’s implicit contingent debt and has a negative impact on economic growth. Unlike the fiscal influence path of explicit debt, implicit contingent debt restrains local economic growth through financial markets. The deleveraging of local SOEs and improving their efficiency can improve the overall efficiency of local funds and reduce the negative effect of local governments’ implicit contingent liabilities on economic growth.

Keywords: efficiency of local SOEs; implicit contingent liabilities; balance between the leverage and growth; leverage transfer; efficiency of capital (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
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