Research On Local Government Contingent Liabilities During Transformation Of China

Contingent liability is one kind of liabilities that may turn to be the direct liabilities in future. It is unpredictable and uncertain. The Chinese fiscal budget system doesn't cover all the information of the government liabilities, so the Chinese local governments have been neglecting the supervision and management of the government contingent liabilities, which are outside of the budget and may become the government's burden in future. Now during the special period of transformation in China, the local governments of different ranks have accumulated contingent liabilities in large scale. Once a number of contingent liabilities turn to be the direct liabilities, it may cause serious risk of government liability, which will bring harmful impact on the safety and continuity of local fiscal operation, also the stability of society. So the local governments in different rank should pay attention to this problem.This paper discusses the topic of the local government contingent liabilities during the transformation of China. Firstly, this paper analyzed the local government contingent liabilities on basic levels including the definition, the statistical standards and its effect for the primitive recognition of local government liabilities. From researching on current situation and data, this paper does the demonstrative analyses on the local government contingent liabilities, which takes the situation in Zhejiang province for example. After the general description of the government contingent liabilities in Zhejiang province, this paper focuses on the government contingent liabilities in the area of local infrastructure construction, the gap of social insurance fund, the operation of local financial institutions and local state-owned enterprises. Then this paper conducts deep analysis of the local government contingent liabilities, which consists of two parts. The first one is the analysis of the causes of local government contingent liabilities. In this part, this paper introduces soft budget constraints theory to explain the reason why so many local governmental contingent liabilities have been cumulated during China's transformation to overcome the defects of previous researches. The second part carries out reconstruction of the early warning system for local government liability risk. In the reconstruction of the early warning system, factors of contingent liabilities are brought into the early warming system. Furthermore, a case study is conducted based on the relevant date in 11 local government departments in city level and 57 local government departments in county level adopted matter element model to structure the early warning model for local government liabilities risk. And when some government department has the warning signal, the size of the local governmental contingent liabilities should be controlled. So in the last part of this paper, the suggestion of how to control the size of the local governmental contingent liabilities is put forward, based on the analysis on the causes of the local government contingent liabilities during transformation of China.