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| Can Autonomous Debt Issuance by Local Governments Improve the Quality of Economic Development？ A Quasi-Natural Experiment Based on the “Self-Repayment” Reform of Local Debt |
| HONG Yuan, HU Huijiao
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| School of Economics and Trade, Hunan University |
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Abstract With the official implementation of the new Budget Law in 2015, which clearly stipulates that local governments must raise debt in a “self-issuing and self-repaying” manner, the reform of local government debt management entered a new era. The comprehensive “self-repayment” reform of local debt has changed the way local governments raise debt for finance, with the “open front door” policy allowing them to issue government bonds within limits, and the “block back door” policy curbing their implicit debt, such as interest-bearing liabilities of local financing platforms. Intuitively, the policy shock by local governments' autonomous debt issuance resulting from the reform will facilitate local governments' efforts to raise funds autonomously according to the economic development needs of their region, while simultaneously imposing hard budgetary and market constraints on local government debt raising and improving local governments' performance in the use of debt funds. Especially in the context of China's economy entering a stage of high-quality development, an analysis of the economic effects of the reform is of great practical importance as it can assist in enhancing the promotion of high-quality development of regional economies by ensuring a standardized, safe, and efficient government debt financing mechanism.
Using the comprehensive “self-repayment” reform of local government debt as a quasi-natural experiment, we empirically analyze the effect of the reform on the quality of regional economic development. The main findings are as follows. (1) The results of the baseline regression indicate that both the “open front door” and “block back door” policy shocks that form part of the reform of local government autonomous debt issuance have a significant and positive impact on the quality of regional economic development. (2) The results of the mechanism test show that the “open front door” policy shock by local government autonomous debt issuance has a scale effect by increasing the use of debt, the effective supply of livelihood public goods, and effective investment in public infrastructure, which is conducive to the realization of regional economies of scale. In terms of structural effects, the “block back door” policy shock can alleviate the crowding-out effect of debt and reduce dependence on land finance, which is conducive to the improvement of resource allocation efficiency and factor input efficiency. (3) A further heterogeneity analysis shows that the above positive effects are weakened in areas with high levels of implicit debt financing before the reform.
This paper contributes to the literature in three aspects. (1) In terms of policy contributions, we conduct a policy evaluation of the comprehensive “self-repayment” reform of local debt to determine how to further improve and optimize the unified system of “borrowing, using, managing, and repaying” local debt and thus to enhance the promotion of high-quality regional economic development; we also provide empirical support for increasing control over local government debt risks and achieving the sustainable development of local government debt. (2) In terms of our research methodology, we use the “self-repayment” reform of local debt as a quasi-natural experiment and select the intensity difference-in-differences method as the main empirical model to test the effects of the “open front door” and “block back door” policy shocks on the quality of regional economic development caused by the reform of local government autonomous debt issuance, and to capture the important debt system factors affecting the quality of regional economic development. (3) In terms of research ideas, based on the perspective of the whole process of “borrowing-using-repaying” government debt, we systematically analyze the impact mechanism of local governments' autonomous debt issuance policy on the quality of regional economic development at two levels, namely the scale effect and the structural effect, reveal the inner mechanism of the change in local governments' debt financing behavior on the quality of regional economic development, and provide evidence that deepens understanding of the correlation between local governments' debt financing behavior and changes in the quality of regional economic development.
Based on the findings, we propose the following policy recommendations to improve the local government debt management system. First, China must further its formation of a transparent and standardized debt raising system oriented toward high-quality development and promote the construction of a market-oriented system for local government bonds. Second, it is necessary to further optimize the investment and use of local government bond funds and strengthen the performance governance of debt projects. Finally, we recommend further accelerating the reform of the local government investment and financing system, and strictly controlling the scale of expansion of local governments' implicit debt.
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Received: 03 March 2022
Published: 08 August 2023
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| Cite this article: |
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HONG Yuan,HU Huijiao. Can Autonomous Debt Issuance by Local Governments Improve the Quality of Economic Development？ A Quasi-Natural Experiment Based on the “Self-Repayment” Reform of Local Debt[J]. Journal of Financial Research,
2023, 515(5): 77-95.
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| URL: |
| http://www.jryj.org.cn/EN/ OR http://www.jryj.org.cn/EN/Y2023/V515/I5/77 |
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