In recent years, the central government of China has intensively introduced supporting policies to stimulate the vitality of private enterprises. However, the issue of local government arrears to private enterprises still persists. In fact, the central government has introduced a series of key measures to tackle the issue of overdue payments to private enterprises. In particular, in July 2016, the National Development and Reform Commission (NDRC) launched a special supervision action for repaying government arrears. The impact of this action on private enterprise confidence has yet to be explored. Addressing the above questions will provide significant practical implications for improving the governance system of local government arrears to boost private enterprise confidence.

Taking China’s special supervision action for repaying government arrears as a quasi-natural experiment, this paper uses data from China’s A-share private listed companies (2012–2021) to empirically test the impact and mechanism of local government arrears governance on private enterprise confidence based on the DID method. The results reveal that the action effectively boosts the confidence of private enterprises, and this effect is more prominent in regions with a poorer legal system environment and in private enterprises with higher external financing dependence and lower export revenues. Mechanism testing shows that this effect is mainly achieved by alleviating liquidity constraints and reducing perception of economic policy uncertainty. Further exploration shows that the action encourages private enterprises to expand effective investments and enhances their TFP, thereby fostering the high-quality development of private enterprises.

This paper contributes to the literature in the following aspects: First, it explores the microeconomic effect of China’s special supervision action for repaying government arrears. Second, from the perspective of local government arrears governance, it expands the literature on factors affecting private enterprise confidence and provides empirical support for boosting private enterprise confidence in China. Third, it supplements the specific mechanisms through which China’s special supervision action for repaying government arrears promotes private enterprise investment. Fourth, it provides important policy implications for effectively stimulating the vitality of private economy growth.