Summary:
In recent years, China's local government debt has continued to expand, leading to an accumulation of associated risks. The mainstream approach historically employed by local governments to address risk shocks and achieve debt sustainability has been fund relocation. While this method possesses strong short-term “blood transfusion” capabilities, it carries potential risks in the long run. Industrial upgrading serves as an effective “hematopoiesis” mechanism, compensating for the limitations of fund relocation. At this stage, achieving local debt sustainability does not solely entail controlling the scale of local debt; rather, it emphasizes striking a balance between short-term “blood transfusion” through fund relocation and long-term “hematopoiesis” via industrial upgrading. This balanced approach aims to promote local economic development while safeguarding against systemic financial risks. Due to the presence of implicit guarantees, substantive defaults are rare in China's local government debt market. However, a segment within this debt structure—non-standard debt contracts (commonly referred to as “non-standard” debt)—has seen its scale expand and experienced numerous defaults. These non-standard debt defaults expose underlying local debt risks, constrain sustainable local debt management, and incur significant economic consequences. Consequently, this paper addresses the following key questions: Are short-term fund relocation and long-term industrial upgrading effective pathways for local governments to respond to non-standard defaults? Under what conditions are local governments more inclined to adopt fund relocation strategies? Conversely, under what circumstances do they prioritize long-term industrial upgrading strategies to prevent debt risks? Based on the above analysis, this paper adopts the following research framework: Following non-standarddebt defaults, the dual pathways of short-term fund relocation and long-term industrial upgrading can provide local governments with liquidity and developmental momentum, thereby mitigating financial risks and achieving debt sustainability. Through manual retrieval and screening of publicly available information, this study compiles data on over one hundred instances of non-standard defaults involving local government financing vehicles (LGFVs) between 2014 and 2021. By matching this with macroeconomic datasets, it examines the impact of non-standard defaults on debt sustainability. Grounded in theoretical analysis and practical experience, the study categorizes pathways to local debt sustainability into fund relocation and industrial upgrading, formulating corresponding hypotheses. It then tests the effectiveness of these different pathways and further investigates their applicable conditions and the circumstances prompting a shift from one strategy to the other. The findings reveal that non-standard debt defaults undermine local debt sustainability by transmitting risk signals. Local governments can mitigate this adverse impact through short-term “blood transfusion” achieved via fund relocation methods such as upper-level government support, as well as through long-term “hematopoiesis” facilitated by industrial upgrading. Further analysis indicates that reliance on “blood transfusion” through fund relocation exposes local governments to two significant pressures: rising borrowing costs and “snowballing” debt. Consequently, some local governments transition towards promoting industrial upgrading to foster fiscal “hematopoiesis”, and thus shift toward “resolving debt through development” . Using China's unique instances of actual non-standard defaults by LGFVs as a starting point, this paper conducts a systematic study of debt sustainability issues. By exploringthe impact mechanisms of short-term fund relocation (“blood transfusion”) and long-term industrial upgrading (“hematopoiesis”) on local debt sustainability, it enriches debt sustainability theory from a risk prevention perspective. The study provides insights into the applicable conditions for fund relocation and industrial upgrading, addressing the critical question of how to implement “resolving debt through development.” This research contributes to the theoretical underpinnings of local debt sustainability, offers theoretical support and optimization ideas for differentiated local debt management, and provides references for improving local government debt financing mechanisms and constructing new models for local debt management.
刘思瑶, 董青马, 尚玉皇, 汤继强. 非标违约后地方债务的可持续路径:资金腾挪还是产业升级？[J]. 金融研究, 2026, 549(3): 39-56.
LIU Siyao, DONG Qingma, SHANG Yuhuang, TANG Jiqiang. Sustainable Path of Local Government Debt after Non-standard Debt Default: Fund Relocation or Industrial Upgrading?. Journal of Financial Research, 2026, 549(3): 39-56.
