Impact of the Real Estate Bubble on Local Government Debt —Empirical Evidence from China

The economic development of China has typically been characterized by the expansion of local government debt alongside the rising risk of a real estate bubble. However, literature that empirically analyzes the risk transmission path between the two factors is limited. This research analyzes the effect and operation mechanism of real estate bubbles on local government debt through a double fixed-effects model, using macroeconomic data from 278 Chinese cities from 2014 to 2022. The empirical results indicate that real estate bubbles have begun to threaten local government debt. This effect is realised through three main channels: deepening local governments’ dependence on land finance, weakening their financial self-sufficiency, and raising local governments’ expectations of external assistance. Heterogeneity analysis reveals that such risk shocks are particularly pronounced in regions with less developed economies and rapid population growth.