Quenching thirst, easing debt: Improvement in water resource endowment alleviates local government debt risk

Water resources serve as a vital pillar sustaining both economic activities and daily life for residents. However, the uneven distribution of water resources across time and space has made water scarcity a bottleneck factor restricting the economic and social development of some regions. The implementation of the South-to-North Water Diversion project provides an excellent quasi-natural experiment for in-depth research on the effects and influence mechanism of cross-regional productive factor allocation on economic development. This study focuses on whether the water resource endowment improvement is reflected on the capital market. Based on the trading data of urban construction investment bonds from 2011 to 2016, we empirically examine how the South-to-North Water Diversion project affects the local government financing costs. The results indicate that the water diversion project significantly reduces the credit spread of urban construction investment bonds from the water-receiving areas. Further analysis reveals that the water diversion project improves the economic fundamentals and increases the land sales revenue of the water receiving cities, enhancing local governments' implicit guarantee ability for the financing platforms, thereby reducing the credit risks of urban construction investment bonds. This study not only enriches the research on the determinants of credit risk for urban construction investment bonds, but also provides empirical evidence from the capital market that the coordinated allocation of productive factors promotes regional balanced development. The conclusions imply that the government should actively advance the corresponding infrastructure construction and institutional arrangements to promote the flow and complementarity of economic elements between regions.