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

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  • Zhang, Man
  • Brookins, Oscar T.
  • Huang, Xiaowei

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.

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  • Zhang, Man & Brookins, Oscar T. & Huang, Xiaowei, 2022. "The crowding out effect of central versus local government debt: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:pacfin:v:72:y:2022:i:c:s0927538x22000026
    DOI: 10.1016/j.pacfin.2022.101707
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    Cited by:

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    2. Liu, Tianming & Xiong, Haifang & Li, Yifei & Wang, Zhiqiang, 2023. "The flight to safety during credit recovery: The role of implicit government guarantees," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    3. Huang, Shuo, 2022. "The unintended consequence of local government debt: evidence from stock price crash risk," Finance Research Letters, Elsevier, vol. 50(C).
    4. Liu, Qiongzhi & Bai, Yun & Song, Hexin, 2023. "The crowding out effect of government debt on corporate financing: Firm-level evidence from China," Structural Change and Economic Dynamics, Elsevier, vol. 65(C), pages 264-272.
    5. Haiyun Ma & Deshuai Hou, 2023. "Local Government Debt and Corporate Maturity Mismatch between Investment and Financing: Evidence from China," Sustainability, MDPI, vol. 15(7), pages 1-17, April.
    6. Peng, Pin & Lin, Gaoyi, 2024. "Local government debt and corporate tax avoidance: Evidence from China," Finance Research Letters, Elsevier, vol. 59(C).

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