The Study Of Reform Of Chinese Local Government Debt Management Mode

Although China’s current "Budget Law" stipulates that “The local budget mustnot contain deficit according to the principle of balance between income andexpenditure and except the other provision of law and the State Council localgovernment must not issue local government bonds”,but for a long time, in fact thereare various local government debts, and with the growing size of the debt, it hasaccumulated a huge debt risk, which becomes a major threat to the financial andeconomic security of our country. According to the Audit Commission announcement,by the end of June2013, excluding contingent liabilities, only the direct liabilitieshave reached10.885917trillion yuan. The Party’s eighteen Third Plenary Sessionclearly state the need to " establish a reasonable standard of central and localgovernment debt management and risk warning mechanism." Therefore, how toimprove the local debt management and prevent and resolve local debt risk hasbecome a major issue of fiscal reform in the current and future period. Based on localdebt management mode reform perspective, the article uses research methods, suchas standard analysis, empirical analysis and comparative analysis to explore the basicideas and specific path to improve local debt management.The paper is divided into five chapters. The first chapter is the introduction. Thischapter explains the background and significance and then conducts a literaturereview study at home and abroad.The second chapter is normative analysis section. This chapter illustrates theconcepts and types of local government debt and the factors that affect localgovernment debt management model, meanwhile analyzes inherent law ofestablishment and evolution of local government debt management patterns. Localgovernment debt management mode refers to system model of division ofresponsibilities and rights and selection management tools between the governmentand the market, central and local government in order to control the local debt risks.There are generally four types, which are administrative control type, cooperativearrangements type, regulatory controlled type and market constraints controlled type respectively. Polity and economic system, the level of fiscal discipline, the degree offinancial self-sufficiency and soundness of financial markets and other factors allaffect the choice of local government debt management mode. Establishing a nationallocal government management model is the result of the comprehensive considerationof various factors. The basic standard to judge the merits of local government debtmanagement model is the environmental adaptability or the fit(adaptation) degreewith each factor above. Therefore, the local government debt management model isnot static, but a dynamic optimal adjustment or reform process with the changes ofabove factors.The third is empirical analysis section. This chapter includes empirical analysisabout the evolution and problems of Chinese local government debt managementmodel. Since the implementation of tax reform in1994, Chinese local governmentborrowing has experienced three stages of forbidding borrowing, agency bonds bycentral government, autonomous borrowing. In three stages, local governments haveno right to get a real sense of debt management and the gain and use of debt funds isunder central government direct intervention. Therefore, generally speaking, ourcurrent local debt management model is administrative control type. Administrativecontrol mode may help the central government debt regulation, effective control of thesize of local government debt and direct debt risk, but there are obvious drawbacks, ofwhich the most prominent one is the small scale, which does not meet therequirements of the hierarchical financial system and result in disguise debt. Whetherit is to control the local government debt risk or protect the financial and economicsecurity, the reform of the existing local debt management model is imperative andhas a long way to go.The fourth chapter is the part of the International Experience. Based on thetypical local government debt management model of the United States, Australia,Japan, New Zealand, the article makes a summary of the experiences for our country.The experience mainly includes that debt empowerment of local government may notlead to scale expansion of local debt; the established pattern of local government debtmanagement needs to be based on its national conditions; different types of management models need to be complement and mixed management model hasbecome a development direction; local government debt management model requiresto build a sound debt budget management system. These experiences have a strongreference to the reform of local government debt management model in China.The fifth chapter is the suggestions. Based on the basis of systematic analysis ofthe factors affecting local government debt management mode reform and learningfrom foreign experience, especially based on the actual situation, this chapter putsforward the goal of Chinese local government debt management mode reform.Because of the unitary system of our country, poor local fiscal discipline, lower levelsof local financial self-sufficiency and unsound financial markets, recently (first stage),our country still need to adopt and improve our administrative control type of debtmanagement,but from a long-term perspective, the administrative controlmanagement model is not target mode and we also need to adjust it timely.Medium-term (second phase) should adopt a "cooperative arrangement type" localdebt management mode; Long-term (third phase) should be a gradual transition to a"regulations and market constraints controlled type" management model.In order to achieve the objectives of the reform of local government debtmanagement model, we propose the following specific recommendations: graduallyenlarge the scope of self-issued local government bonds and perfect bondmechanisms;improve the budget system of local government debt and raise the levelof local government debt budget manage；build local debt risk warning mechanismand control system to improve the ability of local government debt risk prevention；establish and perfect the local insolvency reserve system to improve local governmentsolvency. At the same time, there are following supporting reforms; regulate therelationship between the market and the government, rights and responsibilities ofcentral and local government to clearly define fiscal responsibility to harden budgetconstraints of local governments and improve the level of local self-discipline;improve the financial markets and strengthen market discipline local governmentdebt.