The Analysis Of China’s Local Government Debt Risk Under The Implicit Guarantee Of The Central Government

Since 2008, in response to the economic crisis, China implemented a stimulus focused on infrastructure, three trillion of which need to be resolved by the local governments. But the budget law stipulated that the local government can’t prepare the budget deficit and issue bonds. Therefore, the local governments can only loan through the investment and financing platform. Since 2010, the size of local government debts have been growing. In 2011, the audit office began to publish the debt data. Since the local government debt is facing increasingly out of control situation, the central government began to take some measures to ease the risk. But the risk of local debt is unknown, which requires a quantitative analysis. As is different from the western countries, China is a single country, and at this stage the central government still bears the responsibility for the local government’s credit guarantee. In the past, there were few discussions about this factor, so it is possible to overestimate the risk of local debts.Firstly, this paper describes the characteristics of China’s financial system and the corresponding local forms of debt in different periods since the founding of the PRC. And the audited debt published by the national audit office illustrated the existing debt scale, debt principal, source of funds and investment direction. Then this paper supposes that the debt could cause serious financial risk, credit risk and moral risk.Secondly, this paper explains of the existence of the central government implicit guarantee in our country. China is a unitary state. Since the reform of the tax system, the non-institutional decentralization promoted economic prosperity. But the central government still control the local governments on the aspects of legislation、 administration and justice. Then the KMV model is used for quantitative analysis. The KMV model is a mature model to measure credit risk. Under the implicit guarantee of the central government, local governments tend to ignore the risk of investment projects, and carry out a large number of inefficient investment. In this paper, the difference between the cost of financing and the rate of return is used to measure the implicit guarantee of the central government, improving the traditional KMV model. The analysis found that the local debt risk is steerable. But it is unsustainable, especially in the arrival of the supply-side reform.Finally, the article draws lessons from the experience of France, Japan, the British local government. That is, we should improve the capital market and the PPP model...