On June 14, 2025, the 3rd China Finance Forum was successfully held at Southwest University of Finance and Economics. The collaborative paper by Professor LI Zhisheng, Director of the Base, Associate Researcher JIN Ling, and Dr. WANG Yingdong from the School of Finance, Zhongnan University of Economics and Law, entitled "Local Government Debt Replacement and the Divergence of Enterprise Leverage Ratio - with a Discussion on Optimizing Local Debt Structure"; and the collaborative paper by Professor YU Minggui, Co-Director of the Base, Associate Researcher ZHENG Xinrui, Dr. AN Jianfeng from the School of Finance, Zhongnan University of Economics and Law, and Teacher LI Jinyang from the School of Economics, Shenyang University of Technology, entitled "The Construction of a Unified National Market and High-quality Financial Development: A Study Based on Breaking the Segmentation of Bond Markets", were respectively awarded 2024 Excellent Papers in Chinese Finance.

2024 China Finance Association Outstanding Paper Award Ceremony

Local Government Debt Replacement and the Divergence of Enterprise Leverage Ratio - with a Discussion on Optimizing Local Debt Structure

LI Zhisheng  WANG Yingdong  JIN Ling

Abstract：The mounting debt incurred by the local governments in the past years raises prominent hidden risks in China, which has become a matter of great concern to the Central Committee of the Communist Party of China and all sectors of society. The policymakers are determined to establish a long-term effective mechanism to help tackle local government debt issues and optimize the structure of local government debt. The excessively inflated local government debt originating from the debt-fueled investment paradigm crowds out financial resources for enterprises and weakens the driving effect of government debt on the economy. It also places significant stress on local finance and undermines financial stability. To cope with such problems, the local government debt governance mainly focuses on off-balance-sheet debt such as local government financing platform liability, which is featured with diverse debtors and strong concealment. As more effective measures are required to resolve local debt problems, China launched a special refinancing bond program,known as the local government debt replacement, in 2014-2015 to improve debt transparency and help defuse local debts.In the process of debt replacement, the local government issues bonds to replace off-balance-sheet debts, strengthen the financial supervision of government debt, and improve the government debt structure. The debt replacement has become a major component of China's policy mix to tackle off-balance-sheet debts. As such, employing the reform initiated in 2014-2015 as a representative for debt replacement, this paper investigates the effect of debt replacement on the divergence of firm leverage ratio between state-owned and non-state-owned enterprises(SOEs and non-SOEs). We find that the debt replacement significantly increases the relative leverage level of non-SOEs compared to SOEs. This effect is more pronounced among small and medium-sized enterprises, firms with lower levels of financialization, and regions with higher fiscal decentralization and marketization of credit allocation. These results indicate that the debt replacement increases the credit allocation efficiency, alleviates the deficiency of fiscal decentralization and strengthens the financial support for the real economy. More precisely, the debt replacement mitigates the crowding-out effect of local government debt on non-SOE leverage, increases the bank credit supply and reduces implicit guarantee expectation, resulting in a reduced leverage divergence. The debt replacement also improves the investment efficiency of non-SOEs and reduces the debt risk of SOEs.The asymmetric credit allocation between SOEs and non-SOEs attracts wide attention. Existing literature focuses on the facts and causes of leverage divergence and points out the unneglectable role of government debt expansion. Our study performs an in-depth analysis of the economic effect of debt replacement, and examines how the improvement in local government debt structure affects the leverage divergence in China, which has been rarely discussed. Our study also has explicit policy implications. The local government bond issued in the debt replacement has a much longer maturity and a lower interest rate than off-balance-sheet debt. Accordingly, debt replacement relieves the concentrated debt repayment pressure and coordinates financial security and economic development. As for the competitive relationship between government debt and corporate leverage, the improvement in local government debt structure effectively alleviates the structural imbalance of credit allocation between SOEs and non-SOEs. The optimized credit allocation significantly increases the real efficiency of non-SOEs. In the process of local government debt management reform, the government should attach great importance to comprehensive supervision of local debt, promote marketization and transparency of local government financing, alleviate the structural problem of credit resource allocation, and eventually boost high-quality development.

Key words：Debt Replacement ; Local Debt Structure ; Leverage Divergence ; Debt Risk

Local Government Debt Replacement and the Divergence of Enterprise Leverage Ratio - with a Discussion on Optimizing Local Debt Structure

Yu Minggui  An Jianfeng  Zheng Xinrui  Li Jinyang

Abstract：The Chinese bond market is primarily composed of the inter-bank bond market and the exchange bond market. Historically, most banks were restricted to investing only in the inter-bank bond market until August 2019, when they were granted access to the exchange bond market. This paper examines the policy impact of this reform by studying whether breaking the segmentation of the bond market can improve capital market efficiency and promote financial development.The research findings reveal that the bank access reform significantly reduced the credit spreads in the secondary market for exchange bonds. Mechanism analysis suggests that this access has increased the liquidity of exchange bonds, reduced information asymmetry, and thus lowered bond credit spreads. Furthermore, the reform has also lowered credit spreads in the primary market for exchange bonds, thereby decreasing bond financing costs. Heterogeneity analysis finds that the reduction in credit spreads is more pronounced for bonds issued by private enterprises and small- and medium-sized enterprises in the secondary market, while it is more significant for bonds with strong business performance and high credit ratings in the primary market. Economic consequence tests indicate that the bank access reform has promoted corporate investment.This paper contributes to the research on the construction of a unified national market and the influencing factors of bond credit spreads. It also provides theoretical support and policy recommendations for further developing a unified national market, increasing the proportion of direct financing, and promoting high-quality financial development.

Key words：Unified National Market, Financial Development, Capital Market Reform, Bond Market Segmentation, Credit Spreads