Research On Local Government Debt Under The Perspective Of Decentralization

This paper researches on the local government debt under the background of fiscal expansion given the perspective of fiscal decentralization. In this paper, decentralization is the logical starting point, and this paper commits to explore the institutional roots and the impact to macroeconomic risks of china local government debt, based on the framework of "fiscal decentralization-local government behavior-local government debt".After the financial crisis, the economists and the capital market turn to focus on local government debt risk, which also becomes a important subject in the process of economic transformation. Because of China’s fiscal decentralization reformation and economic growth, local government took a large amount of capital expenditure, under which background local government debt grown fast in the past four year. The direct reason for that was the rising scale of local financing platform companies and rising number of local government debt due to increasing demand of funds for the4trillion economic stimulus plans which should be took by local government in accordance with China’s proactive fiscal policy.This paper try to use a three factors framework including financial decentralization, political centralization and soft financial constraint to analyze the institutional roots of local government debt. Financial decentralization is designed to regulate intergovernmental fiscal relations, which however made the responsibility not match the financial capability of local government, and also made it shortage of local government disposable financial resources for a long time. Political centralization is a political system with Chinese characteristics, made it a intrinsic motivation of local government competition mechanism. As a result, local officials focus too much on GDP growth for the sake of career advancement. Besides, soft financial constraint created the space for local government financing expansion. On one side, the soft budget constraint of central government made it credible of the central government’s endorsement to local government. On the other side, the fierce competition between banks and their soft budget constraint contributed to the local government and bank credit conspiracy.After made deep research on local government debt theory, this paper first discussed the concept of government debt and local government debt, introduced the statistical caliber of China local government debt and the theory of financial decentralization and local government financial demand. Then this paper estimated the scale of local government debt the past four years and introduced the current situation and characteristics of local government debt. Thirdly, this paper put forward the three factors framework of financial decentralization, political centralization and soft financial constraint, holding the idea that it is the three factors what resulted in the local government debt. Finally, this paper analyzed the impact to macroeconomic risks of local government debt and drafted several policy suggestion about how to construct normative system for local government debt financing.