A Study On Local Government Debt In China

As the economy grows slowly and the debts of local governments expand rapidly, the debt financing behavior and its risk has attracted more attention recently. Controlling the local debt risk has become an important issue of the world economic stability and sustainable development. This dissertation tries to study the problems of local government debt in China, search for the deeper reason for the expansion of it, inspect its promoting effect on economic growth, and put forward some policy advices to prevent the local government debt risk.In 1994, Chinese government implemented the share tax reform, and since then the local government debt begins to increase rapidly. In order to stabilize the economy after the international financial crisis, the government has carried out the active fiscal policy. Local governments face the huge gap between the revenue and expenditure, and have to borrow more money to develop the economy. As the local debt expanding, the borrowing mode and the repayment source exposed many problems. If not treated well, it might trigger a systemic financial risk.To study the risk of the local government debt, we first have to know the motivation. It is not only because of the local finance shortage caused by the 1994 share tax reform, but also because of the distortion of financial incentives. By exploring the panel data of provincial and municipal governments, we find that the exceeded fiscal decentralization enlarged the expenditure and budget deficit of local governments, while the promotion incentive of the officials further strengthened this process as the promotion factors significantly influenced their debt financing behavior. Inducing their characteristic variables, we can find out different performances in different terms and ages based on the promotion. They tended to improve their performances through debt financing and thereby improve their career prospects, especially when the possibility of promotion raised. So in order to eradicate the over indebtedness of local governments, current financial system and the performance evaluation system of officials need to be reformed together.Unlike the high social welfare afforded by thedebt of western countries, the local debt in china is used chiefly in construction of urban infrastructure and public programs, and is conducive to social and economic development as well as people's livelihood, and also has repayment sources. This dissertation describs the mechanism of "local debt infrastructure-economic growth" in theory, and testes the relationship between the local government debt and regional economic growth in China based on quantile regression model. The result showes raising money by local governments through debt financing to increase infrastructure spending will accelerate the development of regional economy, and the effectiveness varies significantly on different quantiles. The less developed regions have comparative disadvantage in investment attraction, so we should paid more attention to controlling the debt size.The Detroit and Yubari bankruptcy may hold a lesson for Chinese government to better resolve and prevent emergency of local debt risk. Base on summarizing these lessons and actual situation, we put forward the following policy advices:First, setting up a standard and rational system of the fiscal powerand responsibilities is an important content of improving fiscal system and coordinating the fiscal relationship between the central and local governments. Secondly, the assessment and grading system of the government should be reformed, taking a pluralistic and green index system into account, which contains the livelihood and the debt. The last but not the least, issuing the local government bonds to resolve local debt is the fundamental way to strengthen the management of the debt, and more transparency and legalization in local government debt data is imperative.