List-Based Regulation, Diverging Financing Strategies of Local Government Financing Vehicles, and Credit Risk

This paper treats the list-based regulatory arrangement implemented through the list-based management system for local government financing vehicles (LGFVs) as a quasi-natural experiment. Using secondary-market transaction data on urban investment bonds and financial data on LGFVs, it applies a difference-in-differences approach to identify the effect of list-based regulation on LGFV credit risk. The results show that the implementation of list-based regulation reduces the trading spreads of urban investment bonds issued by LGFVs with greater ex ante dependence on credit financing, indicating that the policy has, on the whole, effectively mitigated LGFV credit risk. Mechanism analysis reveals that, by strengthening differentiated management, list-based regulation drives divergence among LGFVs in their financing capacity and approaches to risk resolution: high-quality LGFVs capitalize on their creditworthiness to accelerate the transition toward market-based bond financing, thereby diversifying their debt structure and reducing financing costs, whereas low-quality LGFVs rely more heavily on government support, such as land injections and fiscal subsidies. Heterogeneity analysis shows that the risk-mitigation effect for high-quality LGFVs is more pronounced in cities where corporate bond financing is relatively large, while the improvement in risk among low-quality LGFVs is concentrated mainly in cities with higher land values; in regions with less government intervention, list-based regulation more effectively exerts its constraining effect through market mechanisms. This paper provides important policy implications for improving the differentiated regulatory framework and for preventing and resolving risks arising from implicit local government debt.