Risk Assessment Of Local Government Financing Platform

Fitch had expressed that loans of Chinese local government financing platforms were facing serious deterioration since this year, and claimed that they would lower China’s credit rating for that reason. The warning that Fitch had issued caused extensive concerns about local government financing platforms by whole society once again. Not only treasury risk theory, but theory of corporate financial early warning had been perfect. In order to assess financial risks more exactly, the paper tried to learn from theories above-mentioned, and we constructed multivariate financial risk indicators on the base of entropy method preliminary. In the beginning of the paper, we introduced domestic and foreign theory of public debt and business financial risks, and discussed the definitions, features and corresponding financial risk indicators of public debt and business financial risks. Then we took it as theoretical basis follow-up analysis. Secondly we investigated the history, operating status and mechanism of local government financing platforms, and analyzed the latent risks from the angle of finance, investment and repayment respectively. Taken specialties of financing platforms into account, the paper subdivided platforms’risks into "fiscal risks" and financial risks from the finance and business point of view. And we took it as a starting point to improve the existing financing risk indicators. By the comparison of some kinds of empowerment approaches, we constructed multivariate financial risk indicators on the base of entropy method preliminary. Then we made an empirical analysis on local government financing platforms in Bengbu, and found that the platforms tended to polarization:Only several platforms had good operations, and financial risks were controllable. The remaining’performance were mediocre, and financial risks were worrying. And the results showed that time interest earned ratio, guarantee ratio and ROE could explain the finance situation of platforms significantly. Then we pointed out some notes when practical application. At the end of this paper, we proposed a series of appropriate suggestions, such as improving the exit mechanism of financing platforms, enhancing self hematopoietic function and bettering asymmetric governmental debt information.