Credit Restoration, LGFV Debt Contraction, and Economic Development

In September 2023, the State Council General Office issued "Document No. 35" (2023), which for the first time systematically deployed central-level financial support for debt resolution and transformation of local government financing vehicle (LGFV). This marked an institutional turning point in local debt governance, ushering in a new phase of systematic system-wide risk resolution centered on hard constraints. Based on a quarterly panel of prefecture-level cities from 2021 to 2025, this study measures regional debt risk exposure using pre-policy default-related public sentiment on non-standard financing and commercial paper, and employs both binary and intensity difference-in-differences (DID) models to examine the impact of "Document No. 35" on regional economic growth and its underlying mechanisms. The findings show that ,relative to low-risk-exposure regions, high-risk-exposure regions experienced an average increase of approximately 0.561 percentage points in year-on-year real GDP growth after policy implementation. Moreover, for each one-log-unit increase in risk exposure intensity, the relative improvement in post-policy economic growth rises by about 0.425 percentage points. This effect is primarily short-term and more pronounced in regions with lower fiscal self-sufficiency, higher non-standard financing shares, and greater short-term debt-maturity pressure. Mechanism tests indicate that the policy reduced city investment bond credit spreads by an average of 0.655 percentage points in high-risk regions, curbed debt expansion, and promoted the market-oriented transformation of financing platforms. This study paper provides empirical evidence for understanding the short-term macroeconomic effects of the current round of local debt-resolution.