On The Problem Of Local Government Debt In China

Local government debt is one of the problems of China finance system demanding prompt solution. China has specific laws and regulations which stipulated that Local governments are not allowed to raise loan by themselves. But in actual operation, local fiscal balance and Local bonds issued by the central can hardly satisfy the economic development of the Local government. Therefore, local government more or less borrows money through a variety of ways to circumvent national laws and regulations. Each province has different sizes and various forms of debt, which the provincial and local government township occupy lower proportion of the total debt, and City and county levels among local governments occupy the higher proportion. Local Governments of China have a huge debt, and part of them debt ratio have been over 100%. The scale of local government debt is increasing year by year, and the debt has grown by nearly 3 times only in 2000-2004. Because the hidden of the risk in local government debt, many areas of local government have been plunged into a super ability to repay a vicious cycle of debt. Some of the blind expansion of local government debt can improve the region’s economic development level and income level at that time, as while as indirectly increase tax revenue of local governments, but the repayment of debt and the resulting debt service obligations have increased the financial burden of the next few years. It can not actively promote economic development and guide; instead it will hinder economic growth. According the special situation and the existing land policy in our country, the local government even as the highest credit rating of the debtor also may be unable to pay debts, which makes a negative impact on the credit risk and credit rating of commercial banks. And driven by the interests, local governments often weaken the control of the ability to repay the debt and the scale of the debt. Sometimes in order to get timely access to financing, local governments often improve the cost of debt, which makes a greater risk of government debt. This seriously damages the government’s image among the masses, and even put the government into a crisis of confidence. Once local governments face financial difficulties, there will be tendency to shift the debt risks to higher level, and then it will finally affect the entire debt system and threat the country’s financial security. In the international environment, it will directly impact the judgment of foreign investment on China’s economic situation and political trends, weaken the power of foreign capital investment, influence the international investment bank’s credit rating of our government and are detrimental to China as a responsible big country’s image and international standing. So, there will be some theoretical and practical significance to research on issues related to local government debt and to make some suggestions on how to standardize management of local government debt in this context.On the basis of a detailed research on the theory of local government debt, this paper first clarifies the formation mechanism of local government debt, and then makes an explanation on the characteristics and the status of local government debt according to the information collected. After that, this paper analysis the risks of the expansion of local government debt and the impact on the national credit system and puts forward recommendations on the management of local government debt from five specifications with local governments and the status of the social and economic life.After that, this paper analysis the risks of the expansion of local government debt and the impact on the national credit system and puts forward recommendations on the management of local government debt from five specifications with local governments and the status of the social and economic life.The whole paper consists of seven chapters. Main contents of each chapter are as follows:Chapter 1 is an Introduction. It describes information about the background, significance and some important innovations of the Paper. It also summarizes the structure of the Paper, introduces some typical and new ideas as well as the conclusion. In addition, it makes the definition and description on the concept of the government and local governments, debt and local government debt, risk、financial risk and debt risk.Chapter 2 is the theoretical as a basis for local government debt. This chapter describes three primary research theory associated with the local government debt:1) Asymmetric information theory. There is moral hazard between local government and creditor, as well as between local government and the guarantor; 2) Motivation Theory. Motivation theory reveals the causes of local government debt; 3) Theory of Institutional Change. It describes the general model of theory of institutional change model, and then explains the changes in the financial system promoting both the adjustment of property rights relationship between central and local powers and the local government to solve the debt problem.Chapter 3 is the formation mechanism of the local government debt. This chapter research on the causes of local government debt from three aspects causes. First, the formation of local government debt has an important relationship with the inequality of property rights and powers between central and local governments in China; Second, many of the local government alienation behavior is the formation of an important reason for local government debt, such as one-sided pursuit of performance of local officials, rent-seeking and rent-creating as well as vicious economic competition between regions; Finally, local governments have many problems of revenue and expenditure, such as local government income tax and financing issues, problems of excessive public expenditure and irrational public expenditure structure and the lack of a unified local government debt management agencies and scientific and rational management of the approval system.Chapter 4 is the basic situation of the local government debt. The scale of local government debt is huge, both the provincial government and local governments all have varying degrees of debt. The debt of urban construction accounted for a larger proportion of local government debt because of the increasing in basic construction investment after the 2008 financial crisis. The loan period of the local government debt is long, and the debt service ratio local government debt is high. Because the local government debt risk warning mechanism is not yet complete, local government debt is lack of risk warning and control mechanisms. This chapter also divides local government debt into four types, and makes an explanation and definition on the content of the four types of local government debt. This chapter also makes presentations on the size, composition, raising methods and uses of local debt.Chapter 5 is major impact on economic performance caused by the expansion of local government debt. The impact on social and economic life brought by the local government debt’s expansion reflected in many ways. The expansion of local government debt will not only affect the government’s financial security, but also affect all aspects of social economy. This chapter focuses on the expansion of local government debt in the economic,especially in the amount and structure of economic development, investment and income distribution, etc. Chapter 6 is impact on the national credit system caused by the expansion of local government debt. First of all local government debt will affect the credibility of the government itself and international image of the government. As the creditor of local government debt is major banks, it will increase the uncertainty on recovery of bank loans, and then might evoke the possibility of financial crisis. The expansion of local government debt can also deteriorate the social credit environment.Chapter 7 is the implications of European debt crisis on China for the management of local government debt. This chapter studies the formation and development of the debt crisis in Europe and makes a detailed analysis of the causes of the debt crisis in Europe. European debt crisis has both positive and negative implications on China. It tells China should pay attention to the issue of sovereign debt, reduce local debt default rates, and to strengthen the capacity of overdue debt settlement.Chapter 8 is suggestion to regulate local government debt management. Specification and control of local government debt is mainly from the building of local government’s own finances, the building of tax system, central government’s supervision of local government, debt and risk control, and local government officials. We should do that expand the source of local government financial and explore more secure financing ways; that actively reform the tax system and establish the distribution system that compatible with the powers; that Strengthen the building of the administrative system and increase the central government’s supervision on local government financing; that introduce risk assessment agencies to establish the local government debt risk control mechanism; that be strict on the standards to appraisal officials and pay attention to the select and supervise the officials.The innovations and shortcomings:Local government debt is a problem with growing concern by the community. This paper uses public economics, finance, economic ethics, and sociological theories and methods to make a systematic research on local government debt in China. This paper may be innovating in the following areas.First, the research makes supplement and improve on the possible risks of local government debt. Domestic scholars generally believe that the current local government borrowing behavior may be a risk. However, the existing research results only see the local government debt crisis on the domestic economic and social impact, while ignoring the state credit would therefore be subject to a severe blow. In the context of globalization, no country can separately exist from the global financial environment, and countries are closely related to the integrated market with competition and co-operation. Local government debt caused a chain reaction that will ultimately affect our country’s credit and status in the world financial system, and even lead to a wider range of financial problems. This is the focus of this paper and the point which our future research must pay attention to.Second, in the form of local government debt, the paper will examine the platforms extended to other local government financing in the form of government debt. The development of foreign government bonds is earlier and local government bonds are also very commonly used as one of the legitimate means of financing. It has played an important role in easing local financial constraints and increasing public investment. Therefore, research in this area abroad is more available to scholars in China. In addition, as a non-formal channel of financing, local financing platform is still very sensitive, there are still many unanswered problems and domestic scholars study was relatively few. This paper argues that to study the local government debt must find out what is the main problem. This article expanded the definition of local government debt to local government financing platform which is hoped to enrich the domestic research on this.Local government debt issues related to political, economic, social and many other fields and aspects. By the level of research, research capacity, and research time constraints, there are many deficiencies on this paper:First, as local government borrowings are illegal, a lot of data and information is difficult to obtain. Therefore, the existing data on local government debt is not accurate enough to estimates the size of the local government debt in the course of the study, which affects the rigor of the paper. Second, as the research method of the papers is single and the papers is lack of empirical process, the papers has been the lack of convincing; Third, this paper’s research on the local government debt is not enough thoroughly because of the hidden of local government financing platform and little research data at home and abroad, therefore, some issues also continue to be strengthened in the future.