A Study On The Development Of China's Local Government Bonds

In current society, governmental revenue and expenditure has great impact on all aspects of social and economic development. Theoretically speaking, in comparison with the central government, local governments have information advantage in the provision of local public goods. And the expenditure of local public goods generally belongs to capital expenditure, Compared with the government revenue, it is more reasonable to building up local public construction funds in the way of raising debts, which will allocate the cost of public project construction into a number of project-benefitted periods, achieving a balance between cost and benefit. Therefore, local governments should be allowed to issue local bonds for local public infrastructure projects to raise funds. And since the local governments are an important part of the government system, in carrying out their functions, local governments need to have appropriate financial guarantee, and debt financing right should be part of local government financial rights.Different from the establishment conditions of David Ricardo's Equal Value Theorem on the national level, on the local level its assumed establishment condition is not that altruistic motives lead to the intergenerational transfer of the debt burden, but that the choice of government tax/debt will be reflected in changes of the local real estate prices, which requires strict presumptions such as sufficient information, the local implementation of single property tax, etc. If reality does not meet these presumptions, the establishment condition of the theorem will be destroyed. Local bonds will enhance the welfare of local residents and stimulate local economic growth and income increase.In the light of reality, since the implementation of the tax sharing system reform in 1994 in China, the imbalance between local revenues and expenditures is growing. Under the pressure of the corresponding management rights, local governments need appropriate financial powers to ensure the fulfillment of their functions. From the perspective of financing efficiency, the use of principal component analysis method and entropy method can reach a comprehensive comparative analysis on the current four financing methods commonly used by the local governments, that is, land financing, platform financing, local bonds financing, etc. from which it can be seen that compared with other financing methods, the local bonds financing is more efficient, therefore it should be the main channel for local governments financing.At present China has certain market basis for the development of local bonds, which can be analyzed form the demand-supply framework of the local bonds market. Now since China's bond market has been preliminarily formed, and the majority of residents and institutional investors have huge investment demand, the development of local bonds is favorable for the central government, the local finance and capital markets, therefore, the supply conditions of local bonds have gradually come to maturity. At the same time, China should develop the local bonds secondary market, and harden the budget constraints of the bonds issuing subjects to further improve the market conditions.Issuing local bonds for local public infrastructure project financing is the world trend. The developed countries such as the U.S. and Japan, etc. have accumulated lots of experiences for China to learn from in developing local bonds market. At present, China's central government issue the local bonds on commission, which is good for strengthening the local bonds credit, increasing issuing efficiency, diminishing the imbalanced development situation among different regions. But it is unfavorable for local governments'initiative, affecting the local bonds'scale and level of interest rate, therefore, it has the transitional feature. China should take practical measures in the aspects such as establishing complete local bonds system, developing local bonds secondary markets, and continuously accelerating the local bonds financing reforms, to promote the development of the local bonds markets.