Credit Risk Research About China Local Government Bonds Through KMV Model

New Budget law came into action in 1th Jan.2015,which gave 31 provinces and 4 special cities the right to issue local government bonds,and the bonds would be paid also by the local government.The new law has violently stimulated the size of the total local government bonds,and the issued bonds amounts increased from 400 billion in 2014 to about 6046 billion in 2016.The sharp increase of the local government bonds fundamentally increased the credit risk of the bonds.This paper firstly studied the related research about the local government bonds,then found three theories basis for issuing the bonds,which are the public finance theory,theory of fiscal federalism and financial ecology theory.After defining of the definition which this paper has studied,this paper has written the history of local government bonds in our country,and also deeply analyzed the current situation of the bonds from the size angle,release mechanism and regulatory mechanisms.After the history and current situation analysis,this paper has emphatically analyzed the credit risk the bonds has faced,and finding that the main reason of credit risks comes from macro political system environment,the distribution structure of the local government bonds and information disclosure.On the basis theoretical analysis of the credit risk of the bonds,this paper has used the revenue data,fiscal expenditure data and the local government bonds data of the 30 provinces through the KMV model to empirically analyze the credit risk of them.The result shows that there are 9 provinces may having credit risk at the accessible 0.4%default probability,and 2 of them from the northeast provinces,5 from the west,1 from the east and 1 from the middle.With the increase of the local government bonds size,the credit risk of it also gains its probability,and the provinces having credit risk centralizes in the west and east north,where either poorly developed or giving lowest economy increasing rate in recent years.When deciding the local government bonds’ issuing scale of different provinces,we should not only consider the absolute fiscal revenue scale but also the increasing rate and volatility rate of it.At last this paper brings 4 advices for the results of the analysis,which are controlling the size of the bonds,establishing credit system of disclosure,improving the quality of credit rating of the bonds and building system of bond insurance.