Fiscal self‐sufficiency, debt policy, and long‐term sustainability in China's emerging local bond market
| Published date | 01 October 2023 |
| Author | Yu Shi,Qing Li,Robert Bland |
| Date | 01 October 2023 |
| DOI | http://doi.org/10.1002/pad.2025 |
Received: 4 October 2022
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Revised: 12 May 2023
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Accepted: 21 June 2023
DOI: 10.1002/pad.2025
RESEARCH ARTICLE
Fiscal self‐sufficiency, debt policy, and long‐term
sustainability in China's emerging local bond market
Yu Shi
1
|Qing Li
2
|Robert Bland
1
1
Department of Public Administration, College
of Health and Public Service, University of
North Texas, Denton, Texas, USA
2
School of Public Administration and Policy,
Renmin University of China, Beijing, China
Correspondence
Qing Li, School of Public Administration and
Policy, Renmin University of China, Room 415,
Qiushi Building, No. 59, Zhongguancun
Avenue, Haidian District, Beijing, 100872,
China.
Email: qingli@ruc.edu.cn
Funding information
Lincoln Institute of Land Policy
Abstract
Using panel data from 155 Chinese provincial‐level governments between 2015 and
2020, this study develops fiscal indicators to measure the sustainability of China's
bond market given its institutional context. With these indicators, the research
empirically explores the effect of fiscal institutions such as centrally‐imposed debt
limits on local governments' debt sustainability. It also investigates the capacity of
local governments for self‐sufficiency to meet their debt obligations and maintain
long‐term sustainability. We find that debt limits have promoted local debt sus-
tainability while local fiscal self‐sufficiency has had little effect on debt sustainability
in the long‐term. The findings provide public finance and policy scholars with an
understanding of the effectiveness of fiscal institutions such as debt limits imposed
by China's central government.
KEYWORDS
China, debt limit, fiscal self‐sufficiency, local bond market
1
|
INTRODUCTION
In the evolution of China's local bond market, a tension exists be-
tween centralized policymaking and decentralized implementation of
those policies. The pattern of policy development has been consistent
over time. The central government announces a policy decision fol-
lowed by a decentralized response by local governments that cir-
cumvents the initial decision that is then followed by a central
government policy designed to short‐circuit the evasive behavior by
local governments. And the cycle continues to repeat itself. While
considerable research has reported on the factors driving the volume
of local debt in China and its economic impact (Anderson, 2017;
Feng, 2013; Pan et al., 2017; Tsui, 2011), gaps exist in the research
literature in understanding the sustainable fiscal development of
debt financing in China to promote local economic development.
Although the research literature lacks agreement on a formal
definition of fiscal sustainability, for purposes of this study it means a
government's ability to repay debt and to perform appropriate public
service functions while maintaining its debt ratio within the limits
imposed by the central government. This definition can be applied to
most countries' debt sustainability. To move toward a future with a
fiscally sustainable local bond market, a study is needed to analyze
the effects of centralized policymaking on the debt sustainability of
its local governments in China.
This research paper has two primary research purposes. We
develop fiscal indicators that measure sustainability of the bond
market given a country's centralized institutional context. With these
measures to assess the impact of the central government's regulatory
oversight (e.g., the debt limit on the gross amount of outstanding
local government debt) on local governments' fiscal self‐sufficiency
and the long‐term fiscal sustainability of the local bond market, the
study has two primary research questions. Do the debt limits
imposed by the central government adversely affect the debt sus-
tainability of local governments? Are local governments with higher
levels of fiscal self‐sufficiency likely to maintain higher levels of debt
sustainability?
This research makes several important contributions to the
existing literature. While considerable research has explored the debt
Public Admin Dev. 2023;43:309–322.wileyonlinelibrary.com/journal/pad© 2023 John Wiley & Sons Ltd.
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