Local Government Debt Replacement and Divergence of Firm Leverage Ratio:On the Improvement in Local Debt Structure
The mounting debt incurred by the local governments in the past years raises prominent hidden risks in China,which has become a matter of great concern to the Central Committee of the Communist Party of China and all sectors of society.The policymakers are determined to establish a long-term effective mechanism to help tackle local gov-ernment debt issues and optimize the structure of local government debt.The excessively inflated local government debt originating from the debt-fueled investment paradigm crowds out financial resources for enterprises and weakens the driv-ing effect of government debt on the economy.It also places significant stress on local finance and undermines financial stability.To cope with such problems,the local government debt governance mainly focuses on off-balance-sheet debt such as local government financing platform liability,which is featured with diverse debtors and strong concealment.As more effective measures are required to resolve local debt problems,China launched a special refinancing bond program,known as the local government debt replacement,in 2014-2015 to improve debt transparency and help defuse local debts.In the process of debt replacement,the local government issues bonds to replace off-balance-sheet debts,strengthen the financial supervision of government debt,and improve the government debt structure.The debt replacement has be-come a major component of China's policy mix to tackle off-balance-sheet debts.As such,employing the reform initiated in 2014-2015 as a representative for debt replacement,this paper investigates the effect of debt replacement on the diver-gence of firm leverage ratio between state-owned and non-state-owned enterprises(SOEs and non-SOEs).We find that the debt replacement significantly increases the relative leverage level of non-SOEs compared to SOEs.This effect is more pronounced among small and medium-sized enterprises,firms with lower levels of financialization,and regions with higher fiscal decentralization and marketization of credit allocation.These results indicate that the debt replacement increases the credit allocation efficiency,alleviates the deficiency of fiscal decentralization and strengthens the financial support for the real economy.More precisely,the debt replacement mitigates the crowding-out effect of local government debt on non-SOE leverage,increases the bank credit supply and reduces implicit guarantee expectation,resulting in a re-duced leverage divergence.The debt replacement also improves the investment efficiency of non-SOEs and reduces the debt risk of SOEs.The asymmetric credit allocation between SOEs and non-SOEs attracts wide attention.Existing literature focuses on the facts and causes of leverage divergence and points out the unneglectable role of government debt expansion.Our study performs an in-depth analysis of the economic effect of debt replacement,and examines how the improvement in local gov-ernment debt structure affects the leverage divergence in China,which has been rarely discussed.Our study also has ex-plicit policy implications.The local government bond issued in the debt replacement has a much longer maturity and a lower interest rate than off-balance-sheet debt.Accordingly,debt replacement relieves the concentrated debt repayment pressure and coordinates financial security and economic development.As for the competitive relationship between govern-ment debt and corporate leverage,the improvement in local government debt structure effectively alleviates the structural imbalance of credit allocation between SOEs and non-SOEs.The optimized credit allocation significantly increases the real efficiency of non-SOEs.In the process of local government debt management reform,the government should attach great importance to comprehensive supervision of local debt,promote marketization and transparency of local government fi-nancing,alleviate the structural problem of credit resource allocation,and eventually boost high-quality development.
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