Summary:
A large number of literatures have explored the reasons for the debt expansion of local financing platforms in China. However, due to the neglect of financing structure and financing sequence, the existing researches lack in-depth analysis of the driving mechanism and economic basis of the debt expansion of local financing platforms. Therefore, based on the pecking order theory, this paper uses the micro-data of China's land market network from 2006 to 2018 and the debt issuance data of financing platforms, and takes advantage of the exogenous impact of the financial crisis to investigate the structural characteristics of the debt expansion of financing platforms after 4-Trillion-Yuan Stimulus Package. Thus, it can provide theoretical and empirical support for accurately identifying, preventing and resolving the hidden debt risks of local governments. The main conclusions are as follows. First, relative to the financial pressure faced by local governments, economic growth pressure is the main reason for promoting the debt expansion of local financing vehicles. Second, when the central government relaxes financing restrictions on local governments, those cities with high economic growth pressure will use financing platforms to prioritize large-scale expansion of non-standard debt, mainly bank loans, rather than urban investment bonds, even when considering the use of urban investment bonds. Third, the leasing of commercial and residential land can significantly encourage those cities with a large economic downturn to more aggressively access bank loans through financing vehicles, while industrial land is difficult to play a similar role. The marginal contribution of this paper is mainly reflected in the following aspects. First, existing literature mainly focuses on urban investment bonds, while this paper integrates urban investment bonds and non-standard debt dominated by bank loans into the analysis framework, so as to examine the relevant problems of China's local financing platform debt in a more comprehensive and accurate way. Second, this paper provides direct empirical evidence for the application of the classical pecking order theory in the field of government investment and financing decision-making. Third, this paper examines the heterogeneous effects of economic growth pressure and fiscal pressure, commercial and residential land leasing and industrial land leasing on promoting the expansion of different kinds of debt of local financing platforms in a more detailed manner, thus enriching the research on the causes of debt of local financing platforms. The research of this paper has important policy implications for accurately preventing and resolving the hidden debt risks of local governments. First, the main reason for the expansion of LGFV debt is economic growth pressure, not fiscal pressure. Therefore, we should gradually change the GDP-led performance evaluation mechanism, and change the behavior of local governments in expanding the debt of financing platforms in order to compete for economic growth from the incentive mechanism. Second, when the economy suffers from negative shocks and declines, local governments, under the pressure of maintaining growth, have a great incentive to expand non-standard debts dominated by bank loans through financing platforms, rather than urban investment bonds. Compared with publicly issued urban investment bonds, these non-standard debt issuance rules are not uniform, debt information is not public, facing greater default risk. Therefore, when preventing and resolving the hidden debt risks of local governments, the central government should consider the characteristics of different debt types and focus on the default risk of non-standard debts of financing platforms dominated by bank loans. Third, the economic basis for the expansion of non-standard debt of local financing platforms lies in the availability of high-value commercial and residential land for mortgage. However, once the real estate is in a downward cycle, the mortgage value of commercial and residential land will be greatly reduced, and the default risk of non-standard debt relying on the expansion of commercial and residential land will rise. In this regard, we should gradually promote the market-oriented transformation of local financing platforms and reduce the dependence on land resources, especially commercial and residential land. In the context of economic downturn, we should rely more on local governments for credit financing rather than relying on financing platforms to issue non-standard debt, so as to reduce the reliance on land financing.
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