The Comprehensive Debt-Resolution Package and the Refinancing of Local Government Hidden Debt: Evidence from the Resumption of Special Refinancing Bond Issuance

China has implemented multiple rounds of debt refinancing since 2015. From the perspective of the resumption of special refinancing bond issuance in 2023, this paper investigates the effects of the comprehensive debt-resolution package on local government hidden debt. The results show that, relative to regions with low debt risk, the resumption of special refinancing bond issuance significantly reduced both issuance spreads and trading spreads on urban investment bonds in regions with high debt risk. Mechanism tests indicate that the resumed issuance strengthened expectations of implicit government guarantees, thereby lowering the financing costs of urban investment bonds. Moreover, both the reduction in spreads and the increase in guarantee expectations were concentrated among urban investment bonds with shorter maturities, higher leverage ratios, and higher ratings. These findings are consistent with the debt option model based on implicit government guarantees developed in this paper. Meanwhile, relative to regions with low debt risk, urban investment platforms in regions with high debt risk increased their issuance of short-term urban investment bonds, suggesting that maturity mismatch risk intensified from the perspective of urban investment platforms. Further analysis, however, finds that the resumed issuance effectively reduced the outstanding stock of urban investment bonds and interest expenditures by converting hidden debt into explicit debt, thereby alleviating debt costs and maturity mismatch risk from the perspective of local governments. At the macro level, although the resumed issuance increased local government fiscal expenditure, its effect on short-term GDP was not yet significant. Accordingly, this paper emphasizes that, in preventing and resolving risks associated with local government hidden debt, differentiated debt refinancing measures should be improved; specialized bond instruments such as special refinancing bonds should be put to effective use; and the relationships among debt refinancing, the transformation of urban investment platforms, and local fiscal planning should be properly managed.