Debt or Defence? The Role of LGFVs in Building Economic Resilience in Chinese Cities

This article examines whether Local Government Financing Vehicles (LGFVs) help Chinese cities absorb local economic shocks or increase urban vulnerability. Focusing on consumption-side risk sharing, it defines urban resilience as the extent to which household consumption is insulated from city-specific output shocks, rather than as employment recovery, production rebound, or long-term adaptation. Using panel data for 283 prefecture-level cities from 2003 to 2019, we test whether LGFV issuance weakens the transmission of idiosyncratic output fluctuations to local consumption. The results show that higher LGFV issuance is associated with a looser output–consumption linkage, suggesting a consumption-smoothing effect of debt-financed local intervention. Mechanism tests indicate that this effect operates mainly through wage growth, credit expansion, local output growth, and FDI growth, rather than direct welfare transfers. The relationship is stronger in cities with higher marketisation, lower policy uncertainty, and stronger fiscal capacity, while western cities display a distinct pattern. LGFVs appear more stabilising during relative growth slowdowns, but not under all weak growth conditions.