Research On The Impact Of Fiscal Soft Budget Constraints On China's Local Financial Risks

As for China's local financial risk,it is deemed as an issue endogenous to changes of China's local economic development.With the expansion of local government debt and the rise of non-performing loan ratios of local commercial banks,potential local financial risks may evolve into systemic financial risks,thus affecting the development of the national economy.Therefore,it is of great theoretical and practical significance to study the causes of local financial risks against the new background,as well as prevent financial risks from further triggering financial crises.The main characteristics of China's local economic development include the local government's economic intervention and the imbalance of economic development between cities.In the context of "fiscal decentralization" and "financial centralization",if local government intends to break through the unbalanced economic development and financial revenue restriction,and keeps playing the leading role in local economic development,it will inevitably rely on the soft budget constraints.Therefore,the soft budget constraints of urban economies play a significant role in generating local financial risks in China.In this paper,taking the impact of financial cycles on financial risks into account,it explores the impact mechanism of soft budget constraints on local financial risks in China from the perspective of domestic financial cycles.Moreover,it proposes the main point: soft budget constraints will trigger local financial cycles through affecting local financial cycles.The stage of local financial cycle and the degree of deviation from the whole country are different.Besides,the influence mechanism and degree of soft budget constraints on local financial risks vary as well.The research of this paper is from normative to empirical.Through theoretical analysis,statistical calculation and empirical test,it gradually deepens the research on the influence of soft budget constraints on local financial risk mechanism.As for the theoretical analysis,first,through analyzing the development model of China's urban economies,it studies the feasibility of applying domestic financial cycle theory to Chinese urban economies.Later,it introduces the concepts of "quasi safe assets",financial system "flexibility" and "pathological" financial cycle in the domestic financial cycle theory.Moreover,it analyzes the factors that form the local financial cycle and the impact path of the localfinancial cycle on local financial risks.Second,this paper analyzes the evolution of the soft budget constraints of local economies,and studies the emergence of soft budget constraint models dominated by land finance,as well as the soft budget constraint models dominated by quasi-safe asset channels in terms of formation mechanisms and impact paths.The reason for the difference and The direct impact of soft budget constraints under the quasi-safety asset model on local financial risks are also discussed.Third,combined with the impact mechanism of fiscal budget soft constraints and the formation mechanism of domestic financial cycles,it illustrates that fiscal budget soft constraints exert effects on local financial cycles from the perspective of credit expansion mechanisms,macro leverage,and industry distribution of credit flows.Fourth,based on the relevant points of the financial cycle theory it analyzes the impact of local financial cycle changes on the external environment of credit expansion.Through model derivation,it is pointed out that changes in the financial cycle will change the regional heterogeneity of monetary policy impacts.Meanwhile,Under different financial cycle stages,the expected stability of financial institutions is different,which makes the proportion of risk transmission channels different.As for the statistical analysis section,a series of fiscal budget soft constraint indicators were constructed,so as to measure the land budget,quasi-safe asset channel budget soft constraint level,quasi-safe asset credit level change,budget fiscal soft constraint and the degree that real estate is endogenous to soft budget constraints.Based on the domestic financial cycle theory,a series of indicators for measuring the local financial cycle and the deviation of the local financial cycle from the national financial cycle were set up,including the medium-term financial cycle indicator,the BIS financial cycle indicator,systematic positive deviation indicator of financial cycle and cumulative positive deviation indicator of financial cycle with simple weighted method.Moreover,with the aid of the financial risk measurement method,a threshold value method of financial risk value is constructed.The simple weighted method of financial risk value takes the cumulative size of each financial risk indicator to measure local financial risk.Through statistical analysis of the various indicators' features,it is found that certain correlations exist among the soft budget constraints,financial cycles and financial risks.The empirical test is divided into two sections for in-depth research.The first part draws on the concept of variable relationship in econometrics,and summarizes the role of the financial cycle when soft budgetary constraints affect local financial risks into the mediating effect and the regulating effect.Moreover,it proposes and prove that the soft budget constraint of the quasi-safety asset channel is the micro-foundation of the financial system's "super-elasticity".And with the change of the local financial cycle,the soft budget constraint will affect local financial risks.Besides,the adjustment of financial cycle will affect the impact of soft constraints on local financial risks.Through empirical analysis,this paper also finds that the quasi-safety asset channel and the degree of real estate are endogenous to the soft budget constraint,which are more likely to trigger systemic local financial risks through passing the financial cycle.And the financial cycle mainly works as a regulator through the deviation and the stage of the financial cycle.In the second part,it mainly tests the realization path of the financial cycle that affects the local financial risk mentioned in the theoretical analysis.The mechanism of soft budget constraints affecting local financial risks through the financial cycle stems from changes in the credit expansion mechanism of the credit currency system and endogenous money supply.Credit expansion under land finance breaks through the constraints of budget revenue,and credit expansion under quasi-safety assets breaks through the constraints of development level of the real economy,and correspondingly increases the degree of soft budget constraints inherent in local government fiscal revenues in the real estate market.Therefore,it reduces the constraints of the development of real economy and the changes of the national financial system in the credit expansion,increases the degree of upward and fluctuating of the local financial cycle,thus increasing the local financial risks.Regarding the adjustment effects of financial cycle deviation and financial cycle stages,by analyzing the changes in monetary policy shock response functions in different financial cycle stages and deviation degrees,the impact of local financial cycles on the regional heterogeneity effect of countercyclical monetary policies is proved;by analyzing the impact of periodic changes in the financial cycle on the trend of land transfer payments and the urban investment bonds,the impact of local financial cycles on the expected stability of market participants is explained.Finally,in light of China's national conditions,this paper puts forward corresponding policy recommendations for preventing and dealing with local financial risks.