Zhao Xuxia, faculty member of the Business School, recently published a paper titled Local Government Debt Expansion, Leverage Ratio Regulatory Pressure and Shadow Banking in theEconomic Research Journal, Volume 2024, Issue 2. Economic Research Journal is an authoritative journal of economics in China. Zhao Xuxia is the first author of the paper, with Prof. Tian Guoqiang, from the Institute for Advanced Studies in Finance and Economics at the Hubei University of Economics and the Department of Economics at the Texas A&M University serving as the corresponding author, while USSTBS is listed as the first affiliation.
Most of the existing studies on the causes of shadow banking have focused on the perspectives of monetary and regulatory policies, and this research paper examines the underlying mechanism of shadow banking formation in China from the perspective of local government debt expansion. First, the impact of local government debt expansion on shadow banking and its mechanism of action are dissected based on a multisectoral DSGE model framework, and the numerical simulation results show that local government debt expansion induces banks to engage in more shadow banking, and the regulatory pressure on leverage faced by banks is an important endogenous factor for the increase in the size of shadow banking induced by local government debt expansion. Then, this paper empirically tests the theoretical findings using unbalanced panel data of 178 commercial banks in China from 2008-2018. The empirical results show that local government debt expansion causes an increase in the size of shadow banking, and the finding holds after overcoming the endogeneity problem and a series of robustness tests. Further, the results of the mechanism test find that regulatory pressure on leverage is an important mechanism through which local government debt expansion affects shadow banking. This paper argues that policy authorities need to fully understand the potential cross-sectoral risks arising from local government debt expansion, clarify the market-based selection mechanism of shadow banking, and strengthen the synergy between fiscal and financial policies in order to fundamentally prevent the intertwined transmission of fiscal and financial risks.
In recent years, USSTBS has been deeply implementing Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era. The school is upholding the spirit of General Secretary Xi Jinping's important speech on writing research papers on and for the motherland. As part of the Talent Strengthening the School strategy, USSTBS is paying more attention to both the quantity and quality of talent cultivation. Furthermore, the school is committed to enhancing the construction of its scientific research platform to create a favorable academic atmosphere and continue to conduct high-quality scientific research.
Economic Research Journal is published by the Institute of Economics at Chinese Academy of Social Science. It has published comprehensive nationwide economic theory since 1955. This journal is recognized as an authoritative journal of economics in China and is also considered a TOP-A List journal at our school.
Translated by Nie Rui
