Local Government Debt Swaps, Fiscal-Financial Governance, and Bank Risk in China

Local Government Debt Swaps, Fiscal-Financial Governance, and Bank Risk in China | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Local Government Debt Swaps, Fiscal-Financial Governance, and Bank Risk in China Ruowei Ma, Xueying Wang This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-9346174/v1 This work is licensed under a CC BY 4.0 License Status: Under Review Version 1 posted 5 You are reading this latest preprint version Abstract Amid rising implicit local government debt risks and tight fiscal–financial linkages, China’s debt swap program has become a key instrument for restructuring local liabilities and mitigating systemic risk. Using bank–region panel data for 2011–2024, this paper evaluates the impact of debt swaps on bank risk and identifies underlying mechanisms. The results indicate that debt swaps reduce bank risk on average, but the effects are highly heterogeneous: risk declines markedly for state-owned banks, whereas non-state-owned banks experience limited improvement. Moreover, higher debt-swap intensity strengthens the risk-reducing effect among state-owned banks. Mechanism tests reveal two channels. Ex ante, by shifting local government credit risk from implicit to explicit, debt swaps affect LGFV bond yield spreads, which transmit to bank soundness through differential exposure. Ex post, by resolving legacy non-standard assets, debt swaps lower non-performing loan ratios overall, although the marginal effect is weaker in regions with greater pre-existing non-standard exposure, consistent with path dependence. These findings highlight the structural nature of fiscal–financial risk transmission and provide empirical evidence to inform local debt governance and the coordination of financial regulation. JEL: G21 G28 E65 Debt Swaps Bank risk LGFV bond yield spreads Non-standard assets Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Under Review Version 1 posted Reviewers agreed at journal 08 Apr, 2026 Reviewers invited by journal 08 Apr, 2026 Editor assigned by journal 08 Apr, 2026 Submission checks completed at journal 08 Apr, 2026 First submitted to journal 07 Apr, 2026 You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. 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Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-9346174","acceptedTermsAndConditions":true,"allowDirectSubmit":false,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":619749940,"identity":"803d7cba-ca8b-4865-bd30-5139ca46f2ab","order_by":0,"name":"Ruowei Ma","email":"","orcid":"","institution":"Beijing Technology and Business University","correspondingAuthor":false,"prefix":"","firstName":"Ruowei","middleName":"","lastName":"Ma","suffix":""},{"id":619749941,"identity":"8e8ee442-3547-4e2b-befd-e6e879de24c7","order_by":1,"name":"Xueying Wang","email":"data:image/png;base64,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","orcid":"","institution":"Beijing Technology and Business University","correspondingAuthor":true,"prefix":"","firstName":"Xueying","middleName":"","lastName":"Wang","suffix":""}],"badges":[],"createdAt":"2026-04-07 13:55:55","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-9346174/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-9346174/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":107480403,"identity":"6e8d6679-5914-4e73-a3d9-d6c805233889","added_by":"auto","created_at":"2026-04-22 02:09:56","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":515946,"visible":true,"origin":"","legend":"","description":"","filename":"LocalGovernmentDebtSwapsFiscalFinancialGovernanceandBankRiskinChina.pdf","url":"https://assets-eu.researchsquare.com/files/rs-9346174/v1_covered_1621447a-0f7f-4d10-b58d-8b48c5b91f46.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"Local Government Debt Swaps, Fiscal-Financial Governance, and Bank Risk in China","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":false,"hideJournal":false,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"economics-of-governance","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":false,"externalIdentity":"eogo","sideBox":"Learn more about [Economics of Governance](http://link.springer.com/journal/10101)","snPcode":"10101","submissionUrl":"https://submission.nature.com/new-submission/10101/3","title":"Economics of Governance","twitterHandle":"","acdcEnabled":true,"dfaEnabled":true,"editorialSystem":"em","reportingPortfolio":"Springer Hybrid","inReviewEnabled":true,"inReviewRevisionsEnabled":false},"keywords":"Debt Swaps, Bank risk, LGFV bond yield spreads, Non-standard assets","lastPublishedDoi":"10.21203/rs.3.rs-9346174/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-9346174/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eAmid rising implicit local government debt risks and tight fiscal–financial linkages, China’s debt swap program has become a key instrument for restructuring local liabilities and mitigating systemic risk. 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