How FinTech Mitigates Local Government Hidden Debt Risks through Competitive Mechanisms?

Abstract

The hidden debt of Chinese local governments has been expanding year by year, gradually becoming a “gray rhino” that constrains China’s high-quality economic development. This pa-per explores how financial technology (fintech) effectively mitigates the local government hid-den debt risks (LGHDR) by optimizing the triple competitive mechanisms between state-owned enterprises, banks, and local governments. Based on data from 2014 to 2021, this paper uses state-owned enterprises as a unique research subject and introduces an innovative approach to measure the hidden debt risks accumulated by local governments through state-owned enter-prises’ (SOEs) gray channels, a perspective that has not been deeply explored in existing liter-ature. The empirical results show that fintech significantly optimizes competitive financing mechanisms, thereby effectively mitigating the LGHDR. Mechanism analysis reveals that fintech achieves this through three dimensions: preventing improper competitive behaviors of enterprises, increasing the intensity of bank competition, and limiting violations of government economic competition. Further heterogeneity analysis indicates that the mitigating effect of fintech on LGHDR is more pronounced in regions with weaker fiscal balances, and greater government investment intensity. Based on these findings, this paper not only provides im-portant practical insights for policymakers but also emphasizes the crucial role of competitive financing mechanisms in ensuring sustainable economic governance and financial stability by integrating fintech, competitiveness, and local debt risk management.