China's Policy to Limit Use of Public-Private Partnerships by Municipalities to Finance Capital Improvements
China’s rapid urbanization in the past four decades combined with the national government’s ambitious goals for economic growth have pressured public officials in prefectural cities to partner with major sources of capital, mostly state-owned enterprises to finance needed capital improvements. Although these public-private partnerships increased in popularity, by 2020 the Ministry of Finance had become concerned at the risk the contingent liability these cities had accrued to the nation’s economic stability. Should these cities default on this growing implicit debt burden, it could have a domino effect on the nation’s financial markets.
In 2015, the Ministry of Finance issued a Guidelines limiting a city’s total public expenditures on PPP projects to 10 percent. Three research questions arise from this cap that are the subject of this research. Does the cap limit the number of PPP-funded projects?
Does the cap cause an increase in the number of user-funded projects? And does the cap cause an increase in the number of government-funded projects? Using detailed data from 2014 to 2019 for 288 prefectural cities, this study answers three questions. We use a robust methodology – regression discontinuity design (RDD) – to create a control group and a treatment group near the threshold of the policy treatment effect, in this case the 10 percent cap on PPP-related debt. As such, RDD is considered an analytical method that closely replicates a natural experiment that obtains reliable estimates of treatment effects.
The results show that the 10 percent cap significantly decreased new issuance of PPP investment by cities under all estimation specifications. The central policy has restrained the scale of new PPP investment. With respect to the second and third research questions – whether cities shift their financing of capital projects to user-paid or government-paid – the results that local governments reduce investment in government-paid projects, while user-paid projects are not significantly affected. The results show that when facing policy regulation on newly issued PPP, local governments prefer user-paid financing and reduce PPP projects that impact their fiscal burden, i.e., government-paid.