Research Of Municipal Bond Market Regulation Institution In China

During China's large-scale urbanization process, municipal bond is not only an important funding source of infrastructure construction for local governments, but also a fundamental part of fiscal decentralization. This paper researches on municipal bond market and tries to establish a regulation framework which covers both theory and practice, such as regulation institution of bond issuance, trading, information disclosure, maturity and default. This paper includes contents as follows:First this paper analyzes current situation and background of municipal bond market, defines key terms such as municipal bond market and bond market regulation, and reviews previous research on municipal bond market regulation by foreign and domestic scholars, which relate to fiscal federalization, public interest and regulation institution theories. Developed countries regard complete information disclosure as core of municipal bond market regulation based on their mature fiscal federalization institution and independent regulation status. Due to China's uncompleted fiscal decentralization reform, domestic scholars call for a clear division of power between central and local governments and formal institution for municipal bond, while emphasis on prevention of over borrowing of local governments with soft budget constraint. Under current context of power division between central and local governments, the right to issue municipal bond is necessary for local governments because there is need to match cost and benefit of infrastructure construction projects. Municipal bond regulation, which represents not only government intervention to market failure but also constraint of central government over local governments, is precondition of municipal bond market development.Second, this paper analyzes fundamental factors of municipal bond market and strength-weakness of regulation institution in U.S and Japan, including historical background, market structure, regulation law, and practice tools. U.S municipal bond regulation market reflects its fiscal federalization feature, which municipal bond issuance is right reserved by states. Federal government establishes a centralized market regulation system in which SEC plays the major role with supplement of self-regulation by MSRB. This system regards complete and sincere information disclosure as the best way to protect investors, which ensures well-functioning of market mechanism. Japanese municipal bond, which is undergoing a changing phase from centralized-control to market-based mechanism, represents a mixture of centralization and federalization in Japanese public finance system. In the past central government of Japan utilized approval system to maintain its effective control over local governments. However, as municipal bonds are silently guaranteed by central government through arrangement of public funding, financial support and approval process, such system sets a soft budget constraint for local governments, which increases fiscal burden of central government. In recent years Japan changes its municipal bond system from approval-based to consultation-based, and establishes fiscal reconstruction system of local governments. Compared to U.S and Japanese municipal bond market regulation, both market and regulation in China are in an early stage of development. It is necessary to establish both law and institution of municipal bond market according to trend of fiscal decentralization and market reform.Third, this paper researches on institutional background, market condition, regulation institution and existing problems of local government bond and city construction platform bond in China, which include typical case study of bond market regulation. This paper assumes that fiscal decentralization and urbanization imply rationality of municipal bond issuance, while the fast growth of local government bond and city construction platform bond indicates potential needs for municipal bond. However, budget law in China forbid local government from borrowing unless with the permission of State Council, which in fact creates a fiscal regulatory lacunae in municipal bond issuance. City construction platform bonds, implicitly guaranteed by local governments, are issued as corporate bonds, which create soft budget constrain for local governments. Market regulation institutions in China, which concern about stabilization of financial market, highly emphasis on principle payment while neglect regulation practice of information disclosure, credit rating and anti-fraud in municipal bond market. Such regulation policy goes against buyer-beware rule and will eventually harm interests of investors.Finally, based on the target of building a transparent and efficient municipal bond market, this paper proposes market regulation goals including complete information disclosure, hard budget constraint and systematic risk prevention, emphasis on rebuilding of principle-agent relationship by legislation and establishing fiscal regulation foundation and synchronized regulation institution for municipal bond market regulation. In legislation area, it is necessary to build a municipal bond market regulation legal system with budget law and public debt law as core, which define basic principles for local governments and their authorized institutions to issue bond. This paper suggests the Ministry of Finance to be in charge of municipal bond issuance regulation. Local Public Debt Management Council, which is a subsidiary of Ministry of Finance, manages local government debt financing plans and approves general obligation bonds. Ministry of Finance authorizes National Development and Reform Commission, People's Bank of China, and Securities Regulation Commission to regulate issuance transaction of revenue bond based on consideration of profession. Municipal Bond Rules Expert Council, which operates under guidance of Local Public Debt Management Council, is a self-regulation institution that makes fundamental principles of financial reports, information disclosure and type classification for municipal bond. It is necessary to include funds supervision in debt management process and adjust local government debt financing plan according to supervision report. In credit rating industry, this paper suggests Ministry of Finance to purchase credit rating of local governments to ensure independence of credit rating agencies. In anti-insider trading, anti-tunneling and anti-fraud area, this paper proposes an internal audit department in Ministry of Finance to monitor local government borrowing and a joint transaction regulation team with Audit Administration and Ministry of Public Security to make up for the fragmented regulation framework of bond market regulation. Besides regulation of issuance and trading activities, there is need to establish an integrated debt restructuring and bankruptcy mechanism for local governments and government financing platforms. A fair and effective debt restructuring procedure with legislative and administrative tools would be necessary to break the non-default expectation and protect essential public resource.Motivation for building regulation framework of municipal bond regulation differs among different countries, yet investor protection and confidence maintenance are precondition for market development. In China's transformation process, a municipal bond market regulation institution with fiscal self-constraint feature is an optimized solution with its political, economic, legislative and historical background.