Leverage of Local State-Owned Enterprises, Implicit Contingent Liabilities of Government and Economic Growth

Abstract

Local state-owned enterprises (SOEs) working together with local governments can promote economic growth. However, an increase in the implicit contingent liabilities of local governments due to implicit guarantees given to SOEs has a negative effect on economic growth. The classical socialist theories and the economic stability in each financial crisis of China show that the macroeconomic efficiency of SOEs is more important than the microeconomic efficiency, and microeconomic efficiency in neoclassical economic theory cannot reflect the nature of SOEs. It is of great practical and theoretical significance to make a more comprehensive and accurate judgment on the efficiency of SOEs. This paper constructs an index of local governments’ implicit contingent liabilities in 31 provinces based on the 488 local SOEs to study the impact of implicit contingent liabilities, and the time period is the year 2007 to the year 2020. Our findings show that an increase in local SOEs’ assets suppresses economic fluctuations at the cost of increasing government’s implicit contingent debt and has a negative impact on economic growth. Unlike the fiscal influence path of explicit debt, implicit contingent debt restrains local economic growth through financial markets. The deleveraging of local SOEs and improving their efficiency can improve the overall efficiency of local funds and reduce the negative effect of local governments’ implicit contingent liabilities on economic growth.

Risk Contagion of Local Government Implicit Debt Integrating Complex Network and Multi-Subject Coordination

“…The main factors of local governments at all levels that affect the implicit debt risk include the following. The first factor is the debt management level α [4]. α directly reflects the ability of local governments to manage implicit debt at all levels.…”

“…Based on the above-constructed risk contagion model of local government implicit debt, we next simulate and analyze the evolutionary characteristics and control strategies for risk contagion of local government implicit debt under multi-subject collaboration. This section sets benchmark values for the debt management level, information openness accuracy, information disclosure strategy, emotion tendency, risk preference level, credit policy robustness, accountability mechanism soundness, and perfection of laws and regulations based on Duan et al [4], Guo et al [5], Liu and Li [6], Feng et al [9], Dong et al [10], Cutura [12], and Zhao et al [13]. The benchmark values for the other parameters in the model are mainly determined based on the research of Wang et al [32], Qian et al [35], and Chen et al [34].…”

“…Local governments at all levels are not only the direct initiators and users of implicit debt, but also the core managers and the main risk bearers [3]. On the one hand, local governments at all levels influence the magnitude of potential implicit debt risk through their financial management capabilities [4]. On the other hand, local governments at all levels use government information openness to influence the level of contagion and attention to implicit debt risk through information channels [5].…”

“…(3) This study not only provides a reference for regulatory authorities to deeply and comprehensively understand the risk formation and contagion mechanism underlying local government implicit debt at the theoretical level, but it also provides a basis for regulatory authorities to formulate policies that prevent and resolve local government implicit debt risk from the practical level. (4) This study addresses two important topics in the literature. First, this study is related to the ample literature on the economic effects of implicit government guarantees [17][18][19][20][21][22][23][24].…”