Research On The Procyclical Effects Of Government’ Financing Debt And It’s Counter-cyclical Policy

In order to cope with the international financial crisis and to stimulate domesticeconomic development, the Chinese government has adopted a proactive fiscal policy andmoderately loose monetary policy, also, launched a plan that allocate4trillion to stimulateeconomy in the late2008. Local government financing platform became the most activeand most noteworthy part of this plan. The number of financing platform in the localgovernment has increased all of a sudden and the debt scale grew unprecedentedly.However, local government financing platform is at the exploratory stage of operations inChina. Serious problems such as high debt ratio, illegal guarantee commitments of localgovernment, lack of project capital and low solvency, etc. lied a tremendous risk. Promptand huge loans from the local government financing platform will not only increase thedebt burden of local government but also form the future financial risk. And the risk can betransferred to the band system so that the credit risk of the banks will increase rapidly.In general terms, the financial risk is pro-cyclical. Bank financing and securityfinancing taken by local government financing vehicles have obvious procyclicalityeffect.This will hold also for the application of working capital.The cyclical fluctuation ofland price also has great influence in solvency of financing vehicles. The causes of debtrisk of local government financing are closely related to the procyclicality. This article willdiscuss the procyclicality formation mechanism of local government from the aboveseveral aspects, and analyzes empirically. In order to stabilize the government financialsystems, and weaken the affect of the procyclicality of government debt, we have toexplore the supervision method of conversion period.