Summary:
In recent years, China has experienced increasing frequency of extreme weather events, and the adverse impacts of climate change on high-quality economic development and the stable operation of the financial system have become increasingly prominent. Meanwhile, the accumulation of local government debt risk has emerged as one of the major sources of systemic financial risk in China. By the end of 2024, the outstanding balance of implicit local government debt had reached RMB 10.5 trillion, much of which was financed through local government financing vehicles (LGFVs). As of December 2025, the interest-bearing liabilities of LGFVs amounted to RMB 68.86 trillion, local government debt levels in some regions remained considerably high. increasingly frequent and severe extreme weather events, post-disaster reconstruction and corporate relief efforts rely heavily on local public expenditure. Excessive debt burdens may crowd out local fiscal space and weaken disaster prevention and relief capacity, thereby further amplifying the adverse effects of extreme weather on the real economy. In this context, clarifying the compounded effects of physical climate shocks and local government debt risk, as well as the corresponding policy responses, is of great significance for China in stabilizing growth and preventing risksamid intertwined macroeconomic and financial risks. Motivated by this, this paper develops a New Keynesian DSGE model and constructs a provincial-level extreme precipitation series based on daily precipitation data from meteorological stations in China from January 1990 to December 2023, matching these data with LGFV bond and listed company financial data. Through this approach, this paper systematically examines, from both theoretical and empirical perspectives, the impact of physical climate shocks on real economic fluctuations under the continuous accumulation of local government debt risk, as well as the corresponding macro-policy responses. On the theoretical side, we construct a New Keynesian DSGE model incorporating households, private firms, LGFVs, retailers, financial intermediaries, and local governments. Theoretical simulations and counterfactual analyses further support the empirical findings. Under scenarios of rising local government debt risk, physical climate shocks generate substantially larger contractionary effects on output, consumption, investment, and corporate credit. Welfare analysis further shows that macroprudential policies involving differentiated risk provisioning for LGFV-related loan assets can improve social welfare. Moreover, the combination of countercyclical macroprudential policies and central bank liquidity support can further enhance welfare outcomes. This paper employs a sample of Chinese A-share listed firms from 2013 to 2023. The empirical results showthat the accumulation of local government debt risk significantly amplifies the inhibitory effect of physical climate shocks on corporate investment. Under a one-unit increase in physical climate shocks, firms located in provinces with relatively high local government debt risk experience an additional 6.13% decline in investment compared with firms in provinces with relatively low debt risk. Mechanism analyses indicate that this amplification effect mainly operates through the corporate balance sheet channel and the bankfirm information asymmetry channel. On the one hand, the interaction between physical climate shocks and local government debt risk significantly weakens firms’ market valuation, depresses Tobin's Q, and raises debt financing costs, thereby crowding out corporate investment. On the other hand, the compounded effects of physical climate shocks and local government debt risk intensify information frictions between banks and firms, particularly among opaque firms lacking executives with banking backgrounds or exhibiting higher analyst forecast dispersion, thereby strengthening financing constraints and further suppressing investment. The marginalcontributions of this paper are threefold. First, we construct a climate shock series for China and reveal the amplification effect of local government debt risk on physical climate shocks. Second, at the micro level, we further investigate the transmission channels of this amplification effect, namely the deterioration of corporate balance sheets and the intensification of bankfirm information asymmetry. Third, we systematically evaluate the regulatory effects of , central bank liquidity support, and countercyclical macroprudential policies under the compounded effects of local government debt risk and physical climate shocks, thereby providing quantitative references for enhancing the consistency of macroeconomic policy coordination. Future research may further incorporate climate transition risk and climate risk into a unified analytical framework to more comprehensively identify and characterize the interaction of compounded risks. In addition, incorporating spatial spillover effects and cross-regional fiscal linkage mechanisms would help deepen the understanding of regional heterogeneity and risk transmission pathways.
丁攀, 李力, 李向阳. 气候物理冲击、地方债务风险与实体经济波动[J]. 金融研究, 2026, 553(7): 114-132.
DING Pan, LI Li, LI Xiangyang. Physical Climate Shocks, Local Government Debt Risk, and Real Economic Fluctuations. Journal of Financial Research, 2026, 553(7): 114-132.
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