High-speed rail and local government financing cost: Evidence from China

Local government debt has grown rapidly in China, threatening financial stability and economic growth and raising concerns globally. Although previous literature has examined various determinants of local government debt cost, little attention has been paid to the potential effect of transportation infrastructure on it. Utilizing data of Chinese municipal corporate bonds from 2008 to 2019, we examine the effect of high-speed rail (HSR) on the financing costs of local government in peripheral cities. We find that HSR access leads to higher issuance credit spread of municipal corporate bonds, suggesting that opening HSR increases rather than decreases local government financial costs. This result is robust after addressing potential endogeneity issues. Moreover, our mechanism analysis shows that the "implicit guarantee mechanism" accounts for this effect. Overall, this paper highlights the essential role of transportation infrastructure in determining local government financing costs.