Market-Oriented Transformation of Local Government Financing Vehicles and Bond Financing Costs: The Dual Perspective of Government and Firm
LIU Guanchun, LIU Hangjuan, WU Jiaqi, HE Feng
Lingnan College/Laboratory of Mezzoeconomics and Regional Industrial Coordinated Development, Sun Yat-sen University;School of Business,South China Normal University; School of Finance, Capital University of Economics and Business
Summary:
Severing the implicit credit linkage between Local Government Financing Vehicles (LGFVs) and local governments, thereby enhancing LGFVs’ self-sustaining capacity through market-oriented transformations, is the foundation of curbing LGFV debt expansion and mitigating local government fiscal risks. Recently, central regulatory authorities have resolutely decoupled the financing functions of LGFVs from local fiscal backstops to accelerate their commercial transformation. Legally, the revised Budget Law of 2015 has prohibited local governments and their subordinate departments from incurring unauthorized debt in any form, aiming to dismantle the sovereign-backed borrowing mechanism of LGFVs and institutionally prevent the generation of hidden liabilities. Subsequently, the 2025 Government Work Report reaffirmed the strategic priority to expedite the divestment of government financing functions from LGFVs and promote their market-based transformations alongside debt risk resolution, further underscoring the pivotal role of LGFV transformation in the framework of local fiscal governance. Theoretically, the policy objective of LGFVs’ market-oriented transformation lies in divesting their public financing mandates, which serves as a binding constraint on the core channel of local hidden debt proliferation. This fiscal tightening compels LGFVs to augment their internal cash-generation capabilities; simultaneously, banking credit resources previously crowded out by LGFVs are liberated, thereby easing the financing constraints faced by non-LGFV private enterprises. Crucially, we hypothesize that this market-oriented transformation exerts asymmetric impacts on the borrowing costs across different bond categories. Specifically, for LGFVs themselves, the reduction in bond pricing premiums is driven by the fundamental enhancement of self-sustaining capacity. Conversely, for non-LGFV firms, the decline in financing costs stems from the mitigation of credit crowding-out and financing frictions. To empirically validate these theoretical predictions, we construct a granular dataset of LGFVs’ market-oriented transformations, manually collected from public disclosures and paired with comprehensive bond issuance data from 2013 to 2023. Employing a staggered difference-in-differences framework, we examine the causal impact of hidden debt governance on corporate borrowing costs. Our baseline regressions reveal that the fiscal rectifications brought by LGFV transformations significantly narrow the primary market credit spreads on both urban investment bonds and ordinary corporate bonds, yielding a dual dividend in lowering aggregate financing costs. Subsequent mechanism tests substantiate that the reform operates via two distinct pathways: it forces LGFVs to improve operational efficiency while simultaneously liberating credit supply to ease the financing constraints of non-platform firms. Heterogeneity analyses further indicate that the spread-compressing effect of LGFV transformation is more pronounced in regions with weaker fiscal capacity, and among issuers characterized by lower profitability or severe ex-ante financing constraints. This paper makes three contributions. First, we contribute to the literature on local government hidden debt governance. By executing a rigorous identification strategy based on LGFVs’ market-oriented transformations, our study circumvents the pervasive endogeneity hurdles inherent in fiscal metrics, providing robust empirical evidence on the dual dividend of hidden debt rectification for optimizing credit allocation. Second, we enrich the empirical line of inquiry regarding the micro-level effects of LGFV reforms. Unlike prior studies that focus on how LGFV consolidation reshapes default risks and risk premiums within the urban investment bond market, we offer a broader perspective by evaluating the structural reallocation of borrowing costs across both public and private sectors. Third, our conclusions offer vital policy insights. We provide a rigorous empirical foundation demonstrating that LGFV marketization is instrumental in balancing hidden debt mitigation with real economy revitalization, offering actionable references for decoupling risk prevention from pro-growth mandates in transitional economies. Based on these findings, we propose several policy recommendations. First, regulators should maintain a steadfast commitment to hidden debt governance and persistently advance the market-oriented transformation of LGFVs. Throughout this transition, policy continuity and stability must be preserved to shield transforming LGFVs from sudden liquidity shocks, ensuring a smooth paradigm shift from government dependence to autonomous corporate operations. Second, authorities should implement tailored policy support, reinforcing categorized guidance and dynamic oversight. For LGFVs in fiscally distressed jurisdictions, guiding them to optimize financing structures through asset reorganizations and the engagement of strategic equity investors is crucial. For platforms with fragile profitability, tailored operational training and technical capacity-building should be deployed to accelerate their transition to commercially viable business lines. Third, financial market infrastructure must be continuously refined to ease corporate financing frictions. Given that the core transmission channel through which LGFV transformation benefits private firms is the mitigation of credit crowding-out, optimizing trading mechanisms and information disclosure standards across both bond and credit markets is imperative.
刘贯春, 柳杭娟, 吴佳其, 何枫. 融资平台市场化转型与债券融资成本:政府与企业双重视角[J]. 金融研究, 2026, 554(8): 56-74.
LIU Guanchun, LIU Hangjuan, WU Jiaqi, HE Feng. Market-Oriented Transformation of Local Government Financing Vehicles and Bond Financing Costs: The Dual Perspective of Government and Firm. Journal of Financial Research, 2026, 554(8): 56-74.
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