Financialization Of Fiscal Risk:Theoretical Analysis And Empirical Evidence

Preventing the occurrence of systemic financial risks is an eternal theme of financial work,so accurately understanding the internal mechanism of financial risks in China is a prerequisite for correctly understanding and preventing of significant risks.The generation of financial risks is rooted in China’s special institutional environment.Due to the systemic correlation between fiscal and financial department as well as the complex credit relationship between various entities,the financialization of fiscal risk is an important inducement for systemic financial risk in China.China has been pursuing a positive fiscal policy since the 2008 financial crisis,which has played an important role in countering external shocks and promoting economic growth.However,the increasing gap between government revenue and expenditure and the fiscal deficit has led to a rising scale of government debt,and in the context of economic slowdown,the expansion of government debt and the causing financialrisk has become the focus of attention.Therefore,a deep understanding of the phenomenon of financialization of fiscal risk,in addition an analysis of the path and mechanism of fiscal risk spillover to the financial sector under the background of China’s reality,have become urgent problems to be solved to prevent and resolve systemic financial risk as well as achieve high-quality economic development.Although the existing literature explores the spillover effects of fiscal risk to financial department from different levels,it is either based on the conclusions drawn from the mature market economy in the West or focuses on the analysis of problems in a certain aspect,so that it is impossible to comprehensively portray the transformation of fiscal risks into financial risks under the deepening period of the market economy with Chinese characteristics at this stage.This paper explores the theoretical connotation and formation mechanism of financialization of fiscal risk under China’s economy and financial development environment,and tries to construct a theoretical analysis framework that meets China’s specific institutional conditions.The paper follows the research paradigm from normative to empirical,and gradually deepens the analysis of the mechanism of the phenomenon through theoretical analysis,model deduction and empirical testing.The first chapter introduces the research background,research issues,research methods and so on,then the second chapter is the literature review,which classifies and elaborates the relevant research on fiscal risk and its transformation to financial risk.The theoretical analysis section is the third chapter,on the basis of defining the connotation of financialization of fiscal risks,the paper summarize the causes and practical manifestations of this phenomenon,then explore the contagion path and transformation process of fiscal risks to financial risks through model deduction.The fourth chapter begins to enter the empirical part,based on empirical evidence at the local level in China,we examines the spillover effects and transformation mechanisms of local fiscal risks from the perspectives of general channels,asset-liability behavior of urban commercial banks,and credit risks of state-owned enterprises’ bond.Chapter seven summarizes the whole research and gives corresponding policy recommendations.In the theoretical analysis section,based on the existing researches and the summarizing of the actual performance of financialization of fiscal risk,this paper defines the connotation of financialization of fiscal risk as the negative externality of fiscal risk to the financial system,it is manifested as the spillover of fiscal risk to the financial sector and the transformation to financial risk,which is an economic phenomenon objectively produced due to the correlation between two departments.By introducing the implicit government guarantee to financial sector and the government credibility on household sector savings,a four-sector model with the characteristics of China’s reality is constructed,which depicts the transformation process and spillover mechanism from fiscal risk to financial risk.The study found there is an nonlinear relationship between the two risks,and only after the fiscal risk exceeding the threshold will there be an spillover to financial risk,which not only leads to a direct risk spillover due to the reduction of the value of implicit guarantees and government bonds in the financial sector,but also result in indirect risk spillover as leading to a decline in the level of reinvestment of the enterprise sector and the savings rate of the household sector,thus forming the financialization of fiscal risks.In the empirical part,based on the reality that China’s fiscal risks are mainly exist at the local level,we examine the formation of financialization of local fiscal risk from different perspectives.The chapter four adopts provincial fiscal risk indicators,examines the nonlinear spillover effect of fiscal risk to financial risk in theoretical analysis from a general point of view,and found that whether from the perspective of government debt burden rate or its growth rate,with the increasing of fiscal risk,the growth rate of local non-performing loan ratio first decreases and then increases,but the growth rate of private sector credit increases first and then falls.The mechanism test shows that local fiscal risks will not only directly spill over into financial risks,and also spills over indirectly by affecting private-sector fixed investment and household savings rates,and the direct effects are greater than the indirect effects.The empirical results support the theoretical findings of the previous chapter,indicating that when the fiscal risk exceeds the threshold,it will be transformed into financial risk through multiple channels.The chapter five examines the risk contagion of fiscal risks to local financial institutions from the perspective of the relationship between local governments and urban commercial banks in China.Based on typical facts and theoretical analysis,this part clarifies when local governments face fiscal risks,in order to promote economic development and improve fiscal sustainability,they will induce urban commercial banks to increase long-term loans and shadow banking business,resulting in an increase in the proportion of long-term assets;then urban commercial will expand their short-term interbank liability ratio in response to the resulting scale expansion pressure,thereby exacerbating the term mismatch,forming the accumulation of liquidity risks,and at last generating the financialization of fiscal risks.Then,using the city-level fiscal data,this risk infection mechanism was validated from both static and dynamic perspectives.From the unique perspective of credit risk of corporate bonds,the sixth chapter analyzes the risk contagion of fiscal risk to the financial system in the implicit guarantee environment of local governmentsto state-owned enterprises.This section points out that the rapid expansion of localgovernment debt not only occupy the local financial resources so as to raise the financing costs of enterprises,but also affects the investors’ risk assessment of local state-owned enterprise bonds and their willingness to invest,then increases the bond risk premium,and thus amplifies the credit risk of local state-owned enterprise bonds.Focusing on the theme of financialization of fiscal risks in China’s current institutional environment,from theoretical analysis to empirical evidence,from general to particular,this paper study the formation mechanism of financialization of fiscal risks.The paper helps to deepen the understanding of fiscal and financial departments relations,and has certain enlightenment for understanding the particularity and objective laws of the generation and contagion of financial risks in China,thus providing reference for prevention and resolution of systemic financial risks and deepening the reform of the fiscal and financial system.