Appointing bankers as governors: Bureaucratic transfers and local government debt dynamics

Abstract

Political factors substantially influence the scale of public debt. To mitigate the vulnerability of local government debt, the Chinese central government dispatched experts to subnational state organs where they served as financial vice governors. This study uses data related to financial vice governors to empirically test the impact of bureaucratic transfers on implicit debt of local governments. The empirical results indicate that the growth rate of the implicit debt experienced an average increase of 9 % after the arrival of the financial vice governor. Regarding the impact mechanism, we attribute the growth in implicit debt to the ability of the financial vice governors to secure financial resources for local governments. Furthermore, our findings demonstrate that the degree of debt risk, marketization, and financial development collectively amplify the impact of the financial vice governor on implicit local government debts.