Econometric analysis finds a 0.0383 percentage point credit spread premium for decentralized cities in China, indicating that fiscal autonomy can increase borrowing costs without provincial...
This paper examines whether administrative decentralization lowers borrowing costs. Exploiting China’s SLCs (separately listed cities) – Shenzhen, Ningbo, Qingdao, Dalian, and Xiamen – as a within-province comparison, we compare SLCs with non-SLCs (the rest of their provinces) sharing the same provincial bond framework. Using province-by-year fixed effects on 2,876 bonds (2021–2025), we find that SLCs carry a positive and significant credit spread premium of approximately 0.0383% points. This premium survives leave-one-pair-out sensitivity analysis, exact permutation test (252 assignments, p = 0.028), wild cluster bootstrap (p = 0.010), and a battery of alternative specifications including province-by-quarter fixed effects, within-pair differenced specifications, and issuer-year and province-year weighted regressions. Heterogeneity analysis reveals that the premium is larger in provinces with low fiscal sustainability and general bonds, consistent with a “guarantee hierarchy fragmentation” interpretation: SLCs are excluded from the provincial implicit guarantee network that benefits non-SLCs. Our findings challenge the conventional view that fiscal autonomy automatically reduces borrowing costs, highlighting the role of institutional design in credit market discipline.
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Sidong Li (2026) studied this question.
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