Local Government Financing And Risk-sharing Mechanism

With the advance of China's market economy, the local governments constitute as independent economic actors and for the construction of the fiscal system, responsibilities and taxes power should be matched to meet the basic requirements. Since tax system reform in 1994, the central government tends to have more taxes power and share fewer responsibilities under the current fiscal system, which will undoubtedly cause the local government's shortage of financial resources. In addition, in recent years, to accelerate the process of urbanization, local government's investments in infrastructure have increased rapidly. Consequently the tendency that capital expenditure results in financial pressure on local government is increasingly apparent.In fact, since the reform and opening up, there has existed local government financing needs. However the demand under the existing financial system has been held up. Since the financial pressure continues to strengthen, the financing need of the local government often through alternative ways gets released. Development and growth of financial markets provides local governments with the objective conditions. On the other hand, the soft budget constraint resulting from the tax system makes the higher levels of government acquiescence of the local government's finance act. So, local governments have established financing platform to get the funds. This approach constitutes as innovation under our current financial system. With the local governments funding gap increasing, local government finance platforms have played a tremendous role in the financing for the construction of infrastructure and been of important practical significance. However, financing approach through the platform is a hidden means and it is difficult to effectively monitor and control by the higher-level governments and their departments. The financing risks of local government therefore continue to gather. Especially since the implementation of proactive fiscal policy during the financial crisis in late 2008, the central government requires that local governments match funds to invest heavily in order to maintain economic growth so that local government debt has risen sharply. As a resuit the total debt of local government is estimated at leat 8 trillion. The financing risks in essence result from that various risks of implicit financing transfer into the financial risk. To resolve this problem, and promote the sustainable development of local government financing, the paper has the following view:Firstly, innovation of the financing system of local government is the fundamental way to solve the problem of risk accumulation. The outbreak of local government's financing risks is rooted in the implicit financing system. In this system, local government's financing is difficult to be controlled. It is difficult to come out with an effective management system. Thus, simply management system of risk from the start, can only act only as a symptomatic treatment and it is difficult to achieve radical results. Currently, the local government finance risks become highlighted, which is the result of the accumulation of contradictions during the evolution of institutional innovation. Further institutional innovation must be a fundamental solution to the problem and constitutes as a breakthrough for the transformation of the "dark" means into an "out" regime.Secondly, the innovation of financing system lies in the establishment of risk-sharing mechanism. To form a sustainable finance system of local government in market we must avoid the excessive transfer of risk to the financial risk. Objectively we need a mechanism to block the sharing of all the financial risks by government. In the finance market, the existence of such risks-benefits matching mechanism provides for building a theoretical foundation for government financing. Thus the mechanism formed by micro-sharing mechanism has the micro participants bear the risk of market and the local governments just bear policy financing risks.Thirdly, the building of sustainable financial mechanism for the local governments to introduce the risk-sharing mechanism acts as the bridge of the risk-return matching mechanism to e financing in a macro way. Local government infrastructure is quasi-public goods of big investment risks and is difficult to rely solely on market mechanisms for funding. But if financial support by local government (policy funded) or investment tax exemption guarantees the market returns of the investors as expected, the main micro participants can bear the market risk. Based on these ideas, this paper proposes countermeasures from the macro level and micro-management aspects to establish risk-sharing mechanism. First of all, to improve the system of financing and have a transparent means of finance, such as the establishment of local bond system in the issuance of bonds while shifting some market risk make it clear in the law and smooth away "Budget Law" obstacles. Second, construct the local governments' policy financing system, while introducing market discipline mechanism. As for the micro-management level, the introduction of market competition, optimization of the risk financing structure through innovative ways and improvement of the risk control processes can be effective.