Research On The Impact Of Local Government Debt Expansion On Regional Financial Risk

The report of the Twentieth National Congress of the Communist Party of China proposed that we should resolutely curb the new implicit debt of local governments,improve the regular monitoring mechanism,focus on strengthening risk source control,steadily resolve the stock of implicit debt,establish a market-oriented and legalized debt default disposal mechanism,resolutely guard against risks,and keep the safety bottom line.In recent years,local government debt in China has been expanding year by year,and the debt ratio of local governments remains high.Currently,under the impact of trade frictions between China and the United States,the downward pressure on the Chinese economy has increased,the ability of local government debt repayment has weakened,and the risk of local government debt has become prominent,leading to hidden dangers in financial stability and regional financial risks beginning to be exposed.The expansion of local government debt affects regional financial risks through various transmission mechanisms,and regional financial risks spread across institutions and regions,ultimately leading to systemic financial risks.The report of the20 th National Congress of the Communist Party of China pointed out that China still needs to solve many problems in preventing financial risks,deepen financial system reform,strengthen and improve financial supervision,and maintain the bottom line of avoiding systemic risks.Based on this,this article reviews relevant literature on local government debt and regional financial risks.Based on provincial data from 2015 to2021 in China,the proportion of local government debt balance to GDP is used to measure the scale of local government debt.Indicators are selected from both macroeconomic and financial markets to measure regional financial risks.Macroeconomic indicators include GDP growth rate,unemployment rate,fiscal deficit rate,and inflation rate,The financial market mainly selects the banking market,insurance market,stock market,bond market,and real estate market,and constructs panel models and spatial Durbin models to empirically test the impact of local government debt expansion on regional financial risks.The research conclusions of this article are as follows:(1)The expansion of local government debt has a positive impact on regional financial risks in the region,and there is heterogeneity among the eastern,central,and western regions.(2)The risk of local government debt has a significant positive spillover effect on regional financial risks in regions with similar levels of economic development,while the spillover effect on regional financial risks in neighboring regions is not significant;(3)Through regional heterogeneity testing,it was found that there is heterogeneity in the spillover effect of local government debt expansion on regional financial risks.Based on the above conclusions,this article proposes the following policy recommendations:(1)establish a reasonable financial system and clearly divide financial rights and powers;(2)Improve the regulatory mechanism for local government debt and promote rational borrowing by local governments;(3)Building a positive cooperative and competitive relationship,and managing local government debts in a cross regional collaborative manner;(4)Promote coordinated regional development and mobilize the rational utilization of resources.