Is Public Accountability for Local Governments' Implicit Debt Effective? Evidence from the Interest-Bearing Liabilities of LGFVs
QIU Zhigang, ZHANG Zhilin, WANG Ziyue
School of Finance, Renmin University of China/ Center for Financial Policy Studies of Renmin University of China; Zhangjiawan Town People's Government, Tongzhou District, Beijing; School of Fintech, Dongbei University of Finance and Economics
Summary:
As China's economy transitions to a “new normal” of slower growth, regulating local governments' implicit debt is crucial for economic and financial stability. The 2014 revision of the Budget Law and the issuance of the Opinions on Strengthening the Management of Local Government Debt have clarified the rules governing local government borrowing, prohibited the illegal creation of implicit debt, and assigned provincial governments the supervisory responsibility and accountability authority over lower-level governments. In 2017, the Ministry of Finance launched a public accountability campaign against raising implicit debt, emphasizing “lifelong accountability and retroactive investigation” to curb debt increments. Recently, central regulation has maintained a “zero-tolerance” stance, shifting toward a dual focus on “resolving the existing stock” and “curbing the increment.” The 2026 Government Work Report further reinforced this by treating the prevention of new implicit debt as an rigid discipline requirement However, implementation issues, such as oversimplified accountability, non-standard procedures, and superficial enforcement, have sparked debate over the actual efficacy of these campaigns. In this context, this paper manually compiles public accountability events initiated by the Ministry of Finance, focusing on the issue of the raising of implicit debt by local governments. Employing a staggered difference-in-differences design, we evaluate the impact of such accountability under the localized responsibility system on the expansion of implicit debt. The study finds that public accountability significantly curbs the expansion of implicit debt in the cities subject to public accountability. Simultaneously, under the localized responsibility system, public accountability strengthens the efforts of provincial governments to control implicit debt within their jurisdictions, leading to a spillover effect that restrains implicit debt expansion in other cities of the same province. Mechanism analysis reveals that public accountability operates through two channels: first, by enhancing supervision and governance over local government implicit debt, thereby reducing opportunities for violations; second, by weakening the performance incentives for local governments to increase investment through raising implicit debt, thereby lowering the motivation for debt accumulation on the expenditure side. Furthermore, advancing accountability regarding key financing channels for implicit debt, such as bank loans and trust financing, enhances the effectiveness of accountability measures. Additional analysis shows that while public accountability may worsen investor expectations regarding implicit debt risks, accompanying policies such as debt swaps can effectively mitigate such concerns. This paper makes three main contributions. First, we broaden the perspective of fiscal decentralization theory by incorporating the localized responsibility system into local debt management. We examine how public accountability influences strategic interactions between provincial and subordinate governments, enriching the vertical management framework of multi-level governments. Second, we identify shifts in local governments' incentives and behavioral logic regarding implicit debt. We show that public accountability not only suppresses implicit debt in penalized cities but also generates a spillover effect across the province by strengthening provincial-level governance. Third, we address the question of what kind of accountability is most effective. We find that targeting primary financing channels and emerging irregular practices improves accountability outcomes, providing a basis for more precise and effective mechanisms. These findings offer several policy implications. First, institutionalizing government transparency and debt supervision is essential for maximizing the efficacy of public accountability. Consolidating provincial localized responsibility facilitates top-down implicit debt control, curbing expansion at lower levels. Second, establishing a coordinated mechanism for debt information sharing and audit supervision across government levels is necessary. Additionally, incorporating implicit debt governance into officials' performance evaluations can help reverse the high-debt, investment-driven development model. Third, accountability measures should target primary financing channels (e.g., bank loans, trusts) and emerging irregular practices (e.g., disguised borrowing via government service procurement). Fourth, differentiated debt resolution policies should accompany public accountability based on regional economic conditions. For regions with high debt risks or heavy reliance on government investment, expanding debt swaps during accountability campaigns can mitigate risks and free up local resources for high-quality economic development.
邱志刚, 张志林, 王子悦. 针对地方政府违规举债问题的公开问责有效吗?——来自地方融资平台有息负债的证据[J]. 金融研究, 2026, 552(6): 57-75.
QIU Zhigang, ZHANG Zhilin, WANG Ziyue. Is Public Accountability for Local Governments' Implicit Debt Effective? Evidence from the Interest-Bearing Liabilities of LGFVs. Journal of Financial Research, 2026, 552(6): 57-75.
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