Budgetary Rigidity, Exogenous Shocks & Rise of Local Government Debt in China

• In Event: Elites and State Capacity in Autocracies

Abstract

Local government debt in China, by various calculations, has reached 90% of GDP, among some of the highest subnational debt in the world. It also rose in a short window of time, mainly since 2012. We hypothesize that fiscal rigidities caused by tax centralization in 1994 and slower revenue growth since 2008 led to local inability to deal with exogenous shocks which boosted expenditures and depleted revenue. Short of a true catastrophe, the central government has been unwilling to provide extraordinary budgetary support when natural disasters struck. Nursing central fiscal strength continued to be a high priority for China’s leaders through two administrations. We first scrape over 30 thousand local bond issuance announcements to create a dynamic picture of provincial level debt increase. We further use satellite and official data on flooding to create a monthly data set of flooding across provinces. We find that small and severe flooding did not lead to a rise in provincial debt but medium severity flooding led to a rise in local government debt, suggesting willful fiscal rigidity to preserve the central government’s fiscal resources.

Authors

• Victor C. Shih, UCSD

• Jonathan Elkobi, Yale University