Local government financing vehicles (LGFVs) mainly adopt three common financing methods: bank loans, LGFV bonds, and non-standard financing. Due to low transparency and lack of standardized data, there is little literature to conduct in-depth research on non-standard financing. However, in recent years, non-standard defaults have occurred frequently, and the negative public opinion they trigger easily drags LGFVs’ other debts into the mire and leads to a regional contagion effect. Given that the central government has always attached great importance to the risk resolution of local debt, it is of great significance to explore the impact of non-standard defaults on the implicit debt of local governments.

This paper uses the bond issuance and non-standard default events of LGFVs, and local economic and fiscal data from January 2018 to September 2023. By comparing the bond issuance time and non-standard default time, it identifies the LGFVs that have experienced non-standard defaults or been affected by the contagion effect before issuing bonds as the treatment groups, and studies whether the treatment groups face higher financing costs in the bond market. The main findings of this paper are as follows: First, the occurrence of non-standard default events of LGFVs will transmit risk signals to the market, resulting in higher bond financing costs for LGFVs that have defaulted. Second, non-standard default risk has a significant contagion effect within cities, and its intensity shows the characteristics of attenuation with time, but the contagion effect between cities is not obvious. Third, the higher-rating, higher-administrative-level, and main LGFVs are more strongly affected by the contagion effect.

The main contributions of this paper are as follows: First, it studies the local debt risk that may be brought by non-standard defaults, enriching and deepening the understanding of related fields. Second, it finds that non-standard default events can expose the actual solvency and credit risk of LGFVs, and have a significant impact on the public financing costs of LGFV bonds, which is suitable as a proxy variable for the credit risk of LGFVs. In the context of the government’s repeated emphasis on breaking the rigid redemption, this finding is conducive to promoting the market-oriented pricing of LGFV bonds.