Economic growth target fluctuation and bond issuance by LGFVs

Abstract

This paper examines the impact of China's economic growth target management system on local government debt. Specifically, it examines how economic growth target fluctuation affects bond issuance by LGFVs from the perspective of economic uncertainty. Using a dataset of 278 Chinese prefecture-level cities from 2005 to 2018, we find that economic growth target fluctuation has a negative effect on bond issuance by LGFVs. We then verify that, on the one hand, economic growth target fluctuation forces LGFVs to take the initiative to reduce bond issuance to avoid risks and the rising bond issuance costs; on the other hand, economic growth target fluctuation induces credit rating agencies to assign low bond ratings due to concerns about local government solvency, making it difficult for LGFVs to pass bond issuance reviews. Furthermore, we find that the negative effects occur mainly in bond issuance for interest-bearing debt repayment and working capital replenishment, and in bonds issued by prefecture-level LGFVs. We also provide evidence that the negative effects of economic growth target fluctuation on bond issuance by LGFVs can be mitigated when economic growth targets are set upwards, and are more pronounced during economic downturns, in regions with higher marketization and looser credit supply.