Risk Transmission of Local Public Debt to the Real Sector: A Perspective Based on Related-Party Guarantees

A thorough understanding of the spillover mechanisms of local public debt risk is essential for preventing and resolving financial risks. Networks of nonfinancial firms constitute a key channel through which financial risks spread, yet existing research has rarely examined this issue. Using a unique dataset on corporate groups, this paper investigates the effects of local public debt expansion on related-party guarantees and the contagion of guarantee risk within corporate groups. The findings are as follows. (1) An expansion of public debt in the city where a subsidiary is located significantly increases the guarantees provided by its parent company, and this effect is driven by privately placed debt; local government bonds issued through public markets have no effect on related-party guarantees. (2) Mechanism analysis shows that local public debt crowds out firms' credit resources, while related-party guarantees help subsidiaries secure an advantageous position in financing competition. (3) Heterogeneity analysis indicates that local public debt expansion induces parent companies to adopt riskier joint and several liability guarantees and to direct guarantees toward subsidiaries with weaker financing and debt-servicing capacity. (4) Related-party guarantees induced by local public debt expansion increase parent companies' litigation, financial, and operational risks, exacerbate firms' market risk, and reduce the overall value of corporate groups. (5) Intensifying debt swaps can significantly mitigate the effect of local public debt expansion on corporate related-party guarantees. This study is of considerable value for understanding the transmission mechanisms of local public debt risk and promoting sound interactions between finance and the real economy.