The Research Of Local Government Debt Problem In China

As China’s local government debt scale is becoming bigger and bigger, the debt crisis begins to be exposed. Therefore, based on the system cost as the breakthrough point, the author strives to build an explaining framework of local government debt. Local government debts of China havea typical transitional characteristic. Under the background of macro structural imbalance, local government debt’s predicament underscoreslocal government funding requirements which amplifies the effectof system’s limitation and lack.Therefore, in transitionperiod, the system costcaused by system’s limitation and lack is the main reason of forming the local government debts.System cost and the local government debt shows positive correlation.The transition economies aiming at developing economic often raise the necessary social resources outside the system. The intention is to reduce the system cost, but it increases the cost of system transformation and so as to make the transition economies into the dilemma of debt puzzle.In the transition period of our country, thelimitation and lack of financial system, political system, budget system and debt management systemcaused the leverage to the investment mode of local governments. Fiscal decentralization has led to that local governments rely on extra-budgetary revenues; Political centralization has encouraged local government officials to borrow and develop the economic; Officials by adopting generate in soft bound of budget of local government. Hence, fiscal decentralization makes the local government have intrinsic motivation to raise loans. At the same time, investment-led economic stimulus policies, higher credit rating from banks to the local government and borrowing system innovation, which accelerate the rise of local government debt scale.Therefore, correcting the understanding of the potential risk of local governments in our country, and analyzing its forming reason using the framework of system cost, will help us to develop practical and feasible measures to prevent and control the financial risk. The policy advice prompted the benign development of the local government debt is as follows: changing the unequal fiscal decentralization between the central and local the governance; Shifting the pattern that economic development depends on the government investment; Improving official evaluation mechanism; Establishing channels for local government legal debt; Establishing a standardized, perfect administration system of local government debt. The debts should be brought into the fiscal budget under social supervision; Reforming the financial system and improving the local government investment and financing mechanism.