The Crowding-out Effect of Local Government Financing Platform Debt on Enterprise Investments: A Debt Regulation Perspective

This research investigates the impact of China’s recent debt regulation on the crowding-out effect of local government financing platform (LGFP) debt on enterprise investment. We find that the crowding-out effect of LGFP debt on enterprise investment has significantly weakened since the implementation of debt regulation. The policy effect is more significant for enterprises with greater financing constraints and higher sensitivity to market-based debt pricing than those with lower financing constraints and pricing sensitivity. In addition, debt regulation has produced more satisfactory results in regions with faster marketization and more developed financial systems. The primary mechanism underlying the effect of debt regulation policies is debt replacement and the market-based reform of LGFPs. In particular, replacing debt with instruments that have more explicit financing purposes, along with transforming LGFPs into industrial investment companies that rely less on direct fiscal support, helps ease the crowding-out effect. Overall, our findings offer valuable insights for improving government debt systems in emerging and transitional economies, thereby fostering economic vitality and enhancing fiscal stability.