Debt Structure and Interest Payment Burden in China’s Local Governments: Evidence from Mixed-Effects, System GMM, and Policy Shock Models

Abstract

This study employs a sample of 31 provincial-level local governments in China from 2015 to 2023, utilizing mixed-effects models, system GMMs, and interaction term models to systematically analyze the mechanism by which debt structure influences interest payment costs. Findings indicate that hidden debt serves as the primary driver of interest payment pressures. Its high cost and insufficient repayment constraints significantly exacerbate local fiscal burdens. In contrast, budgetary debt exerts limited influence under most conditions but functions as a fiscal stabilizer during special periods such as deleveraging campaigns and pandemics. Further analysis reveals significant inertia in interest payment costs, manifesting as “short-term relief but long-term accumulation”, exposing path dependence in local governments' rolling debt issuance. By examining three dimensions—overall, dynamic, and policy shocks—this study uncovers the dynamic evolution mechanism of local debt risks. It enriches existing understanding of debt sustainability and provides valuable empirical insights for optimizing local government debt governance and fiscal policies in emerging economies.