Local Government Debt: Causes and Empirical Analyses

Wu Xun, Yu Qiao

Abstract: This article concludes that the Chinese local government debt problem is the result of the interplay among local governments, the central government, and banks. The causes of the local government debt problem include: implicit central government guarantees leading to local government moral hazards, massive local infrastructure investments driven by short-term economic growth targets, and distortion of bank-lending behavior, such as the neglect of default risks. Based on the empirical analysis, this article shows that more infrastructure investments, fiscal transfers, and bank support of government-dominated industries will lead to greater local government debt. The empirical findings support the above factors as the key causes for local government debt problem. Finally, this article suggests several policies to resolve the local government debt problem.

Key Words: Local Government Debt; Key Causes; Governance Policy