A Study Of The Problem Of Local Government Financing In China

The world was deeply shocked by the financial tsunami which happened in theU.S. in2007and affected the whole world and all people worried that the worldwidegreat depression of economy would happen again. The four trillion investment planprovided by the central government may inject into a one shot in the arm for thedomestic economy which may decline rapidly because of the financial tsunami. Thecentral government planed to invest in the basic industries and the public services andthe local governments of various provinces of the country were full of confidence inthe economic construction. In order to support the investment funds from the centralgovernment, the local governments financed through various channels and means forgetting enough project construction funds. Therefore, a series of problems fromfinancing activities of the local governments are urgent for deep discussion andresolution.This paper compiles relevant literatures at home and abroad and refers torequirements of China’s reform of the fiscal and financial system. The paper aims toestablish a local public service system and determines the framework and proceduresof the issue of local governments financing. We find that local governments financingis closely related with China’s fiscal system reform through compiling thedevelopment process of China’s local governments financing since the founding of thecountry. We also find that the relationship between various financing bodies (such asthe central government, local government, privates or enterprises and banks) is verycomplex and all stakeholders repeat game in the process of financing. Althoughfinancing activities of local governments are reasonable and necessary, there is lack oftheoretical guidance for the development process of financing activities, which cancause a vicious cycle for local governments financing, that is to say “As long as thecentral government decentralizes, local governments financing will be active; oncelocal governments financing is active, it will be random; the central government willwithdraw the right of financing of local governments if local governments financing is random; local governments financing can’t survive after the right is withdrawn.” Thispaper assume that there are more or less questions in division of functions,decision-making mechanisms, financing models, the system of supervision andenvironmental construction of local governments financing. After compile the historyand current situation, this paper extracts the difficulties and questions of China’s localgovernments financing and provides experiences and lessons for improving localgovernments financing.This paper analyzes the LGFC debt financing by the cost-benefit approach andconcludes that the benefit from local government debt financing is much higher thanthe cost of financing under the present relationship between the central governmentand local governments. This paper also concludes that the appropriate specification ofcosts and benefits from debt financing can make local government debt financingkeep reasonable scale of the debt under a well-functioning mechanism. In order toadjust the behavior of various stakeholders reasonably, this paper analyzes thefinancing activities for providing public goods of enterprises, banks, the centralgovernment and local governments through the use of game theory. At last, the paperholds that the goal of local governments financing is to establish a good system oflocal public services and a local government financing mechanism which has clearresponsibilities, scientific decision, flexible model, effective monitoring and suitableenvironment.