Research On Municipal Bonds Development In China

Municipal bonds are issued by local governments and their authority or agency. Its debt funding sources are tax or project revenue. Municipal bonds are important means for local governments to raise funds for urban infrastructure and social welfare projects. Municipal bonds can effectively compensate for the financing gap caused by urbanization construction. At the same time, municipal bonds have many advantages, such as low cost, long term, and high liquidity, etc.. Therefore, municipal bonds have become the main financing method for local government in countries all over the world. However in China, the "Budget Law" of 1994 edition limited the debt financing of local government. In order to fill the financing gap of urbanization construction, China’s local government bonds development experienced five stages, including the urban construction investment bonds, treasury lending bonds, bonds issued by central authority on behalf of local government, local self-issued bonds and bonds issued and repaid by experimental local governments. These non-standard debt financing ways of local government accumulated risks. And there also exist other problems, for example soft budget constraints. Therefore China should establish municipal bonds system which are more market-oriented. Since 2014, with the promulgation of some documents, including the "Budget Law" of 2014 edition and "Advice on Strengthening Local Government Debt Management" issued by the State Council, China has confirmed that the general bonds and special bonds are legitimate forms of debt financing for local government. And since 2015, this policy has been effected in the 34 provinces, autonomous regions and municipalities and five cities under separate state planning. General bonds and special bonds are embryonic forms of municipal bonds. Some systems associated with it still need to be established while some need to be improved to effectively prevent debt risk and standardize the debt financing of local government.Dalian is selected as a sample to discuss the development of municipal bonds system in China. This paper is divided into seven parts:The first part is the introduction. It introduced details in five aspects, including the background and significance of the paper, review of current domestic and foreign research, the research approach and logical framework of the paper, the research methods of the paper, the innovation and shortcomings of the paper.The second part is the general analysis of municipal bonds. Firstly, this part elaborated the basic concept of municipal bonds, including the meaning, characteristics and classification of municipal bonds; Secondly, this part introduced theoretical basis for municipal bond issuance from four aspacts, including the theory of public goods and local government financing channels, fiscal decentralization theory and functions of city government, local governments competition and liabilitiy preference theory and the theory of financial ecology and regional bond market environment; Finally discussed the necessity of the development of municipal bonds from four aspects, including capital needs of urbanization, financial system reform, regional bond market structure and financing channels of local government and debt risk prevention.The third part is the evaluation of the development process of local government bonds. Firstly, this part discussed the development of local government bonds since the Reform, including local government financing platform and urban construction investment bonds, treasury lending bonds, bonds issued by central authority on behalf of local government, local self-issued bonds and bonds issued and repaid by local governments; Then compared municipal bonds with local government bonds in different stages and concluded that municipal bonds are the most rational and standardized financing instruments for local government.The fourth part is the international experience and reference in developing municipal bonds. Firstly, this part took the United States and Australia as representatives of federal state while Japan and France as representatives of unitary state. Then introduced the development, the supervision and approval, the issuance and repayment of municipal bonds in these countries. It also covered the risk control of municipal bonds in federal state; Finally, on the basis of concluding experiences of four countries, this part proposed four enlightenment and reference for China.The fifth part is the analysis on the necessity and advantages for Dalian to develop municipal bonds. Firstly, analyzed the necessity of developing municipal bonds in Dalian from five aspects, including making up the financing gap, lowering financing costs, norming debt financing channels, improving debt management and optimizing the structure of the bond market; Then analyzed the advantages of municipal bonds developed in Dalian from five aspects, namely the financial and economic situation of Dalian, debt management system, the credit rating situation, the development degree of financial markets and Dalian’s ranking in China’s major cities in terms of the qualification in issuing municipal bonds.The sixth part is the mode selection and system design of Dalian’s municipal bonds development. Firstly, Dalian should establish the local governent debt financing system with municipal bonds as its main body while giving priority to the development of revenue bonds and cautiously issuing general obligation bonds; On this basis, this part designed the institutional framework of municipal bonds, including the approval and supervision system, issuance system, circulation system and reimbursement system; Finally this part designed credit risk control and prevention mechanisms of municipal bonds, including fiscal rules and scale control system, information disclosure system, the credit rating system, bond insurance system and debt risk warning system.The seventh part is the construction of legal and other related systems. It was discussed in terms of the legal system, fiscal and taxation system, Financial Ecology environment, and relationships among different bonds.In this paper, the research methods include normative and empirical analysis, qualitative and quantitative analysis, inductive and deductive reasoning and literature review and theoretical analysis. There are three innovation points:Firstly, proposed the route of municipal bonds development in China on the basis of Dalian; Secondly, obtained Dalian’s ranking in China’s major cities in terms of the qualification in issuing municipal bonds; Thirdly, inferred the safe bonds issuance scale of Dalian City through KMV model.