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Investing like conglomerates: is diversification a blessing or curse for China's local governments?

Jianchao Fan, Jing Liu and Yinggang Zhou

No 920, BIS Working Papers from Bank for International Settlements

Abstract: This paper examines how China's local governments make investment via financing vehicles (LGFVs) and provides new insights on often-criticised LGFVs from a different perspective. Using data for 4,432 LGFVs from 1,225 counties across China between 2005 and 2018, we show that since 2014, the function of LGFVs has changed from financing conduits to conglomerate platforms with more diversified investments. While a certain level of diversification can be a blessing for local economic growth, over-diversification is a curse. Such an inverted U-shaped relationship depends on the condition of the local economy. Over-diversification may lead to rising local debt and crowding-out effects on private investment.

Keywords: local government financing vehicle; diversified investment; government debt; conglomerate (search for similar items in EconPapers)
JEL-codes: E61 G21 H72 O17 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2021-01
New Economics Papers: this item is included in nep-cna, nep-fdg, nep-mac and nep-ure
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