China's local government debt has risen dramatically bringing risks to China's fiscal sustainability and long term economic growth. Using urban construction investment bonds (UCIBs) issued by local government financing vehicles (LGFVs), we study how intergovernmental fiscal transfers impact the issuance of UCIBs under China's unitary currency system. Applying instrumental variable estimation, we find that special-purpose fiscal transfers per capita are positively associated with the issuance of UCIBs. A one-RMB increase in special-purpose fiscal transfers per capita is associated with an increase in the issuance of UCIBs per capita of 0.282 RMB, whereas regular fiscal transfers (including tax rebates and general fiscal transfers) do not affect the issuance of UCIBs. Furthermore, the effect of special-purpose fiscal transfers on the issuance of UCIBs mainly exists in inland cities rather than coastal cities. This imposes risks of “eurozonization” for the Chinese economy. We also find a deterioration of refinancing in terms of issuing more UCIBs.

Large-country development faces the challenge of meeting the dual goals of economic growth and regional development, while resolving the tension between these two objectives. Over the past decade, the Chinese government has attempted to use the allocation of construction land and fiscal transfer payments to encourage the industrial development of its underdeveloped areas. This paper shows that this attempt was accompanied by an overall economic slowdown and a decline in resource allocation efficiency, which not only undermines the international competitiveness of China's economy, but also creates an elevated risk of debt. The paper points out that the realization of China's dual goals of efficiency and regional balance will require increased labor mobility rather than a simple increase in the scale of policy driven resource relocation.

This paper investigates the influence of city scale on employment using data from China. Probit models of employment determination are estimated. The historical population growth during China's planned economy, when migration was directed by the government and voluntary location choice was prohibited, is used as the instrumental variable of current population size. Instrumental variables estimates show that it is more likely for individuals to gain employment in big cities. A 1 percent increase in city scale increases one's employment probability by between 0.044 and 0.050 percentage points. Moreover, the scale advantage of big cities is heterogeneous among individuals with different levels of human capital, with the least-skilled workers benefiting the most.