China’s local government debt has risen dramatically, which brings risks to China’s fiscal sustainability and long term economic growth, and intergovernmental fiscal transfers are of critical importance to it. From the lens of Urban Construction Investment Bonds (UCIBs) issued by Local Government Financing Vehicles (LGFVs), we study how intergovernmental fiscal transfers impact the issuance of UCIBs under China’s unitary system. After the application of instrumental variable estimation, we find special-purpose fiscal transfer per capita is positively associated with the issuance of UCIBs：specifically，an increase in the special-purpose fiscal transfer per capita by one yuan RMB is associated with an increase in the issuance of UCIBs per capita by 0.282 yuan RMB; whereas, regular fiscal transfer (including tax rebate and general fiscal transfer) has nothing to do with the issuance of UCIBs. Furthermore, the effect of special-purpose fiscal transfer on the issuance of UCIBs mainly exists in the inland cities instead of coastal cities. This imposes the risk of Eurozonization for the Chinese economy. A further study also finds the deterioration of refinancing in terms of issuing more UCIBs.
