The Political Economy of China's Local Debt

By analysing the development and operation of local government bonds (LGBs), a new tool fashioned by the Chinese government to finance infrastructure projects, this article improves the understanding of the political economy of China's local debt. We find that the central government uses LGBs to intervene in local debt and pursue policy objectives, and designs a quota system to decide the bond issuing amount and the project selection. When calculating quotas, the central government prioritizes limiting financial risk and achieving national development goals. Local debt should match the fiscal capacity of local governments, and the projects should contribute to the sectors emphasized by the central government as important for national development, reflecting the centralization of central–local relations. However, LGBs hardly fix the problem of local debt, and the pressure to maintain economic growth by expanding infrastructure investment has pushed local debt to an alarming level.