A research paper co-authored by Professor Peng Yuchao of the School of Finance at the Central University of Finance and Economics (CUFE), together with Li Xiaoming from the University of International Business and Economics, Zheng Liu from the Federal Reserve Bank of San Francisco, and Xu Zhiwei from Fudan University, has recently been published in the Journal of Monetary Economics, a leading international journal. The paper is titled “The crowding-in effects of local government debt in China.”

Based on micro-level loan data, the study examines how changes in the structure of local government debt in China affect bank risk-taking, credit allocation, and local productivity. Using a difference-in-differences identification strategy, the authors find that China’s 2015 local government debt swap program significantly increased banks’ risk-taking through the capital regulation risk-weight channel.

Specifically, the debt swap program converted local government financing vehicle (LGFV) bonds held by banks into local government bonds, thereby reducing banks’ risk-weighted assets. This, in turn, encouraged banks to expand lending to private enterprises and lowered borrowing costs for these firms. The study shows that the effect was particularly pronounced in provinces with larger outstanding local government debt. The reallocation of credit toward more productive private firms significantly improved total factor productivity, demonstrating a clear “crowding-in effect.”

The study provides important insights into the relationship between financial regulation and the real economy, and offers innovative academic contributions from China to the understanding of local government debt management.

The paper can be accessed at: https://www.sciencedirect.com/science/article/abs/pii/S0304393226000371.

Writers: PENG Yuchao

Reviewers:GOU Qin

Editors: LI Ying

Approvers: HUO Xiaoran