SMU SOE Seminar Series (May 22, 2025): Flood Risks and the Chinese Local Government Debt Crisis: Climate Shocks, Borrowing Behavior, and Fiscal Stress

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ABSTRACT

This study examines how climate risks, particularly floods, exacerbate China’s local government debt crisis. Using a staggered difference-in-differences approach, we find that floods lead to a 44.5% increase in municipal corporate bond (MCB) issuance as local governments seek emergency funding. However, heightened investor risk aversion results in an 8.23% rise in issuance costs. Our findings highlight how climate shocks amplify fiscal stress by increasing both borrowing needs and financing costs. By bridging climate finance and municipal debt literature, this study underscores the urgent need for integrated fiscal and environmental policies to enhance financial resilience in climate-vulnerable economies. 

Keywords: Climate Risk, Floods, Local Government Financing, Municipal Corporate Bonds, China.

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