Research On Debt Risk Of China’s Local Government Financing Platform

In2008, the global financial crisis broke out, and it was caused bythe subprime mortgage crisis. To tackle the crisis, the centralgovernment of China adopted a proactive financial policy andmoderately loose monetary policy, and proposed a four trillioneconomic stimulus plan. However, in this four trillion, more thanseventy percents was supported by the local government, that is to say,the local government built the infrastructure to develop the localeconomy by raising funds. For the local government, on the one hand,it was influenced by the tax sharing system in1994, and on the otherhand, it was also influenced by the financial crisis, and the recession ofthe economic development resulted in the reduction of local taxes.Therefore, the large number of the infrastructure constructioninvestment needed by the local government supporting policy and thepresent poor situation of the local government income became a hugecontradiction, and the local revenue was facing a huge gap. Therefore，the local government has to raise funds by the way of givingdebts. However, Budget Law of China provides that, it is forbidden forthe local government to give debts. So the local government has toroundabout to raise funds by building the local government debtfinance platform. At the same time, the nation also supports thepredominant local government to set up the debt finance platform.Therefore, between the end of the year2008and2009, the local debtfinance platform expands rapidly.However, the platform of local government shows non-normativeperformance in the process of rapid expansion. It includes thatimperfect structure of corporate governance, the division ofresponsibilities between the platform and local government is not clear,own hematopoietic function is insufficient and so on. As a result, ithides high risks of debt behind the rapid expansion of the platform oflocal government.Firstly, the paper describes the theoretical basis through the theoryof local financing platform, local government debt risk, public goodsand public debt passed on in different generations. Secondly, startingfrom the background and the course of development of local financingplatform, the paper shows the status quo of China’s local governmentdebt financing platform from the size, structure and the quantity ofplatforms with the latest data released by the Audit Commission. And then we make a detail analysis for manifestations and causes of thedebt risk of local financing platform from three levels of the financingplatform itself, local government and financial institutions. Finally,corresponding to the three levels and combined with the characteristicsand experiences of investing and financing of foreign local government,we give suggestions to guard against the risk of debt for China’s localfinancing platform.