The Optimal Size Of Local Government Debt In China

After the Financial Crisis, the frequent debt crisis makes the debt issue attractwidespread attention. Controlling the size of the sovereign debt and keeping theeconomic sustainable development have become the main goals of most country. Asthe sovereign debt issues became more and more serious, the local debt issues beganto appear. During the Financial Crisis, China has keeping a steady economic growthrate which is the legend of the world. However, in2010, as the size of the local debtwas published, the prohibitive size made the local debt issue an important issue whichmight affect the development of the economy in China. Since the local governmentdebt not only can promote the economic development, but also can cause local fiscalcrisis, it is important to decide the optimal size of the local debt in China.Moreover, compared to western countries, the local government debt issue has somespecificities. The Budget Law prohibits the issuance of bonds and it makes the size ofthe local government debt difficult to be measured. So except for the commonproblems in all countries, the special problems also need deep analysis.Based on local government theories and the management experience of Brazil localgovernment and America local government, this article analyses the current status ofthe local government debt in China from three aspects: size, problems and causes.Furthermore, using the principles of economics and multiple linear regression model,the direct and indirect factors which affects the local government debt size isanalyzed. Based on debt-to-revenue, new debt-to-expenditure, repayment of capitaland interest-to-revenue ratio, combined the basic national conditions of China, theoptimal size model of local government debt is built. Meanwhile, after summarizingthe current status, causes and optimal size of local government debt, this article puts forward the policy proposal about the management of local government debt inChina.