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<p>Local Government Financing Vehicles (LGFVs) serve as a critical nexus between China’s fiscal and financial systems, yet systematic understanding of their debt risk transmission mechanisms remains limited. Using quarterly data from 2012 to 2024, this study constructs a Structural Vector Autoregression (SVAR) model incorporating real GDP growth, fiscal deficit ratios, bank non-performing loan (NPL) ratios, and LGFV bond spreads. Key findings reveal: (1) Fiscal position serves as the systemic hub of the risk transmission network. Variance decomposition reveals that fluctuations in fiscal conditions are the largest external source of volatility in the banking system (contribution &gt; 34%) and the primary external driver of risk repricing in the bond market (contribution approximately 5%). (2) A critical mechanism exists whereby debt risk feeds back into the fiscal position. Impulse response analysis shows that a shock to LGFV bond credit spreads leads to an increase of 26.55% in the fiscal deficit ratio with a two-period lag, an effect that remains consistently positive. (3) The real economy exhibits a short-term insulation effect from these risks. The combined contribution of various fiscal and financial risks to fluctuations in economic growth is less than 3%. These findings underscore that maintaining fiscal sustainability is fundamental to containing systemic risk.</p>

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The Debt Risk Transmission Mechanism of Local Government Financing Vehicles: Evidence from National-Level Data and an SVAR Model

  • 期刊论文

  • 出版模式：

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  • 发表日期：

    2026年4月30日

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  • Debin Fang,
  • Liang Xu,
  • Yang Liu

摘要

Local Government Financing Vehicles (LGFVs) serve as a critical nexus between China’s fiscal and financial systems, yet systematic understanding of their debt risk transmission mechanisms remains limited. Using quarterly data from 2012 to 2024, this study constructs a Structural Vector Autoregression (SVAR) model incorporating real GDP growth, fiscal deficit ratios, bank non-performing loan (NPL) ratios, and LGFV bond spreads. Key findings reveal: (1) Fiscal position serves as the systemic hub of the risk transmission network. Variance decomposition reveals that fluctuations in fiscal conditions are the largest external source of volatility in the banking system (contribution > 34%) and the primary external driver of risk repricing in the bond market (contribution approximately 5%). (2) A critical mechanism exists whereby debt risk feeds back into the fiscal position. Impulse response analysis shows that a shock to LGFV bond credit spreads leads to an increase of 26.55% in the fiscal deficit ratio with a two-period lag, an effect that remains consistently positive. (3) The real economy exhibits a short-term insulation effect from these risks. The combined contribution of various fiscal and financial risks to fluctuations in economic growth is less than 3%. These findings underscore that maintaining fiscal sustainability is fundamental to containing systemic risk.