The collaborative paper titled 'Local Government Debt Replacement and Corporate Leverage Differentiation: A Study on Optimizing Local Debt Structure' by Associate Professor Jin Ling from the School of Finance, Professor Li Zhisheng, Director of the Talent Introduction Base, and Dr. Wang Yingdong from the School of Finance, was officially published in the second issue of the prestigious domestic journal 'Economic Research' in 2024.

In 2014, China initiated reforms in the management system of local government debts, with debt replacement playing a crucial role therein. From the perspective of three rounds of debt replacement and their outcomes, debt replacement has substantially converted a large portion of off-balance-sheet debts into local government bonds, thereby optimizing the debt structure of local governments, reinforcing financial supervision over local government debts, and becoming an integral component of China's current and future comprehensive debt restructuring plans.

Focusing on the debt replacement plans launched in 2014-2015, this study explores the impact of optimizing the debt structure of local governments on the differentiation of leverage ratios between state-owned enterprises and non-state-owned enterprises. The research finds that the debt replacement plans have led to a significant increase in the leverage ratio of non-state-owned enterprises relative to state-owned enterprises, thereby alleviating the differentiation issue in leverage ratios between the two. Heterogeneity analysis indicates that the governance effect of debt replacement on leverage ratio differentiation is mainly manifested in enterprises with low degrees of financialization and in small and medium-sized enterprises, which helps enhance the ability of financial services to support the real economy and improve the efficiency of credit resource allocation. Debt replacement can also mitigate the negative impacts associated with fiscal decentralization, with market-oriented credit allocation being a crucial condition for debt replacement to effectively govern leverage ratio differentiation. Additionally, debt replacement can alleviate the crowding-out effect of local government debts on the financing of non-state-owned enterprises, increase bank credit supply, reduce expectations of implicit guarantees, and create a favorable environment for the financing of non-state-owned enterprises, thereby optimizing the allocation of debt resources between state-owned and non-state-owned enterprises. Furthermore, debt replacement enhances the investment efficiency of non-state-owned enterprises while reducing the debt risks of state-owned enterprises.

Based on the basic facts of leverage ratio differentiation among Chinese real enterprises, this article explores the impact of debt replacement on the allocation of debt resources among different types of enterprises, contributing to a comprehensive understanding of the economic effects of debt replacement and the optimization of local government debt structures. The research in this article has clear policy implications. Debt replacement not only extends debt maturities but also substantially reduces interest burdens, helping alleviate the debt repayment pressure from concentrated maturities of local government debts and coordinate the resolution of local debt risks with stable development. Considering the competitive relationship between government debts and corporate debts, the optimization of local government debt structures can effectively alleviate the structural imbalance in the allocation of debt resources between state-owned and non-state-owned enterprises, and is conducive to improving the efficiency of the real economy. In advancing the reforms in the management system of local government debts, great attention should be paid to marketization, comprehensive supervision, and full-process regulation of local debts, continuously optimizing local debt structures, alleviating structural issues in credit resource allocation, and promoting high-quality development of the real economy.

Author Biography

Li Zhisheng, Vice President and Professor of Southwestern University of Finance and Economics, Director of the Innovation and Intelligence Introduction Base for Digital Technology and Modern Finance Discipline. His main research areas include financial innovation, financial risk management, market microstructure, and regional financial development. He has led multiple projects including the 111 Project of the Higher Education Discipline Innovation and Intelligence Introduction Plan, major projects funded by the National Social Science Fund, as well as projects supported by the National Natural Science Foundation of China (NSFC), including both youth projects and general projects. His research results have been published in journals such as Economic Research, Economic Quarterly, Financial Research, Journal of Banking and Finance, and Journal of Financial Markets. He has received numerous awards including the second prize of the National Teaching Achievement Award (Undergraduate), the special prize of the Teaching Achievement Award of Higher Education Institutions in Hubei Province, the first prize of the Teaching Achievement Award of Higher Education Institutions in Sichuan Province, the first prize of the Excellent Achievement Award of Social Sciences in Hubei Province, and the first prize of the Excellent Achievement Award in Decision Support Work by Hubei Provincial Party Committee, among others. He has been selected for national talent programs such as the Young Talents Project, the New Century Excellent Talents Program of the Ministry of Education, and the Hubei Provincial Postdoctoral Excellence Program. He has also received honors such as the Hou Yunde Young Teacher Award and the Hubei Famous Teacher Award. He serves as a member of the National Financial Professional Degree Graduate Education Steering Committee, Vice President of the Hubei Provincial Finance Association, and Executive Vice Chairman of the Hubei Provincial Association for Technological Economy and Management Modernization Research.

Wang Yingdong is a doctoral candidate at the School of Finance, Zhongnan University of Economics and Law.

Jin Ling is an Associate Professor at the School of Finance, Zhongnan University of Economics and Law. Holding a Ph.D. in Economics, Jin also serves as a researcher at the Innovation and Intelligence Introduction Base for Digital Technology and Modern Finance Discipline. His research focuses on financial development, financial innovation, and financial crisis management. He has published numerous papers in journals such as Economic Research, Economic Quarterly, Journal of Management Sciences, Financial Research, Journal of Financial Markets, and Pacific-Basin Finance Journal. Jin has led several projects including a postdoctoral scientific fund project and has participated in major projects supported by the National Social Science Fund. His papers have been recognized with awards such as the Outstanding Paper Award in Financial Research for the year 2021.