The Double-edged sword: China’s local government special bonds and county-level economic growth

This is the authors' abstract. We don't add key points for this paper.

The burgeoning issue of local government debt has emerged as a pivotal factor influencing the trajectory of sustainable economic growth in China. Using a novel county-level panel data spanning from 2015 to 2023, we document an interesting point: Despite the designed self-liquidation mechanism of local government special bonds(LGSBs), there is an inverted U-shaped relationship between LGSBs scale and economic growth. Models with instruments variables and GMM estimations confirms the robustness of our findings. Mechanism analysis reveals three primary channels through which LGSBs influence local economy: (1) land transaction volumes, (2) allocations of special bond quotas, and (3) public investment under the pressures from debt repayment obligations. Heterogeneity analysis shows that the effects are more pronounced within counties with nascent economic structures and heightened fiscal duress. These findings offer novel insights into the interplay between fiscal restructuring and local economy, highlighting the unintended consequences that LGSBs fails to overcome growth constraints.