The Research Of Debt Financing And Market-oriented Transition Of Local Government Financing Vehicles

After the new "Budget Law" in 2015,the Implicit Local Public Debts(ILPD)have become a major risk and peril that may easily lead to systemic fiscal and financial risks,even hinder the sustainable and healthy development of economy and society in China.The main way to generate ILPD is that LGFVs(Local Government Financing Vehicles)borrow debts that local governments may undertake expenditure or guarantee liability in the future.Therefore,clearing up or specification of LGFVs is the key to prevent and defuse the risks from ILPD.However,there are few studies focus on how to define LGFVs scientifically and accurately,and there are also lacking of research on the expansion of debts of LGFVs from the perspective of micro-dynamic mechanism.This paper attempts to make an in-depth analysis of the problems and risks of ILPD in China from the two aspects above.Based on a systematic review of various definitions of LGFVs given by government departments and industry institutions,this paper redefines LGFVs and MIBs(Municipal Investment Bonds),and establishes a new database of MIBs(2571 LGFVs from 2006 to 2018,including the logic and steps to build it).The accurate definition of LGFVs clarifies its concept connotation and standardizes the different or fuzzy cognition of LGFVs among all walks of life.Using the new database,it finds that MIBs have the characteristic of “policy bonds”.This paper traces related institutions from views of macro background,including central-local fiscal relationship,public investment and financing system,and doubletrack system of local SOEs' governance.The interaction between the formal fiscal system and informal system creates institutional space for local governments to borrow money through LGFVs.The debt financing rules determined by the financial system and the asset instruments of land are the basic premise that local governments can improve the financial potential of LGFVs.The investment and financing system of government investment establishes the rationality and self-consistency of LGFVs as the financing tool of local government investment.The lack of modernization of management about local state-owned enterprises has created a hotbed for local governments to rely on LGFVs for a long time.Combined with the existing literature(including borrowing motivation,institutional space,asset tools and sources of funds),this study extracts the micro-dynamic mechanism of LGFVs to borrow heavily,which is financial potential that refers to the credit advantages that LGFVs have in the finance market.The roots of financial potential are local government's asset extension and risk joint guarantee for LGFVs,which cause the asymmetry between assets and risks.The financial potential provides a new perspective for the following study on the ILPD in China.With help of the new database of MIBs and Wind database,this paper uses the financial statement data of domestic bond-issuing companies(distinguishing between LGFVs and general market companies)to quantify and identify asset extension,risk joint guarantee and financial potential,respectively.LGFVs have obvious and unreasonable financial potential advantages over general companies.This paper makes an in-depth statistical analysis of the asset extension and risk guarantee of LGFVs,and calculates the asset extension,risk guarantee and financial potential of LGFVs with the help of Wasserstein Distance each year between 2006 and 2018.The measure above further verifies the financial potential theory being constructed in this paper.Based on a field survey about the local public debt practice of a county-level city in East China,there is one important finding: the indirect financial decentralization under the extension of fiscal decentralization is the basic characteristic of allocation of financial resources by local government.Indirect financial decentralization means that local governments create financial assets through LGFVs,and utilize the power of financial market(i.e.,financial potential energy)to continuously attract funds from various financial institutions,so as to control all kinds of financial resources indirectly.With the help of quasi-natural experiment of "replacing business tax with value-added tax" pilot,this paper uses difference-in-differences model to verify local governments' preference for indirect financial decentralization,and conducts mechanism analysis with land transfer revenue as intermediary variable.By further analysis,it is found that indirect financial decentralization can positively promote fiscal revenue and economic development,but it is not sustainable that non-standard debt will have a rapid negative impact.Then to the financial market,the standardized debt of LGFVs(i.e.,MIBs)actually reduces the dependence of local investment on local savings and promotes the free flow of funds within the regions of a country,which effectively enhances financial integration.By verifying that the dependence of local investment on local savings is significantly reduced due to MIBs,this paper can make an empirical test that the expansion of MIBs promotes financial integration.And the research designes the double-fixed effect model and instrumental variable model respectively,which tests robustly that MIBs promotes financial integration effectively.Furtherly,using indirect financial decentralization as the core explanatory variable,it's found that the ability of local governments to allocate financial resources(i.e.,indirect financial decentralization)promotes financial integration significantly.It should be noted that financial integration is also strengthening the market constraints of financial markets.In order to prevent and dissolve the risks of ILPD effectively,targeted policy measures should be taken to curb the asset extension and risk joint guarantee,and to eliminate the unreasonable financial potential advantages of LGFVs.Strengthening the market's role in effective allocation of financial resources,isolating the government credit and the market credit,accelerating the standardization of land assets management to curb indirect financial decentralization.Tracing institution helps us to find that LGFVs show diversity and complexity regarding their different function,location and administrative ranking,which makes it difficult to implement market-oriented transition of LGFVs.Using information from field surveys and dataset of LGFVs,this study divides LGFVs in China to 18 categories according three basic dimensions,i.e.,function,location and administrative ranking.Then depict characters of different types of LGFVs based on three factors,i.e.,resource endowment,initiative endowment,and market endowment.Last,this paper designs four intermediate goals and practical path for market-oriented transition of LGFVs,and prospects some problems may arise during the transition.The study provides a reference for cracking the puzzle of how to realize market-oriented transition of LGFVs in China.