Lu, Ming, and Huiyong Zhong, 2018, “Eurozonization of the Chinese Economy: How Do Intergovernmental Transfers Affect Local Government Debt in China?” Asian Economic Papers, vol. 17 (1), 1-18.

Eurozonization of the ChineseEconomy:

How Do Intergovernmental TransfersAffect Local Government Debt in China? * 

Ming Lu

Antai College of Economics and Management, Shanghai Jiaotong University

No.1954, Huashan Road, Xuhui District, Shanghai, China

luming1973@sjtu.edu.cn

Huiyong Zhong (corresponding author)

School of Finance, Shanghai University of International Business and Economics

No.1900, Wenxiang Road, Songjiang District, Shanghai, China

zhonghuiyong@gmail.com

Abstract: China’s local government debt has risendramatically, which brings risks to China’s fiscal sustainability and long termeconomic growth, and intergovernmental fiscal transfers are of criticalimportance to it. From the lens of Urban ConstructionInvestment Bonds (UCIBs) issued by Local Government Financing Vehicles (LGFVs),we study how intergovernmental fiscal transfers impact the issuance of UCIBsunder China’s unitary system. After the application of instrumental variableestimation, we find special-purpose fiscal transfer per capita is positivelyassociated with the issuance of UCIBs：specifically，an increase in the special-purpose fiscal transferper capita by one yuan RMB is associated with an increase in the issuance ofUCIBs per capita by 0.282 yuan RMB; whereas, regular fiscal transfer (includingtax rebate and general fiscal transfer) has nothing to do with the issuance ofUCIBs. Furthermore, the effect of special-purpose fiscal transfer on theissuance of UCIBs mainly exists in the inland cities instead of coastal cities.This imposes the risk of Eurozonization for the Chinese economy. A furtherstudy also finds the deterioration of refinancing in terms of issuing moreUCIBs.

Keywords: Intergovernmental Fiscal Transfers, LocalGovernment Debt, UCIBs,Eurozonization 

^*This paper is supported by Major Program ofNational Social Science Foundation of China (13&ZD015). We thank forTengjuan Xia’s excellent research assistance.