A Study On The Sustainability Of Local Government Debt In China

S&P downgraded China's long-term sovereign credit rating in September 2017,draws my attention to the problem of local government debt in China.With the slowdown of local government fiscal revenue growth,and the rapid development of urbanization,local government is increasingly dependent on debt funds.As well as the encouragement of positive fiscal policies,the sustainability of local government debt has aroused widespread concern.Chapter 1: Concept Definition and Theoretical Framework Construction.This paper defines the scope of study as local government debt with direct repayment responsibility,and gives the definition of government debt sustainability.Based on Domar debt model,government Intertemporal Budget Constraint model,"Fiscal Fatigue" theory and Debt Balance theory under financial perspective,the theoretical framework of this paper is constructed.The theoretical framework demonstrates the necessary and sufficient condition of sustainability of government debt: Under certain debt policy,the debt burden ratio converges within debt limit,then the debt is sustainable.Five variables that determine the sustainability of local government debt are: Primary balance ratio,Government's ability to adjust Primary balance,Average debt interest rate,Nominal economic growth rate and Direct benefit from debt investment project.The derivation process illustrates the mechanism of how does theses variables affect the sustainability of government debt.Chapter 2: An analysis of the status of local government debt.The paper finds that the Sustainable risk of overall local government debt is not significant yet,distributing in “West High and Low East” status and mainly concentrated at the cities and counties.Debt funds are mainly used for public welfare infrastructure construction,therefore it is difficult to generate direct benefits.After bond replacement,the liquidity risk is not significant,debt interest rate has fallen sharply,and the central government has strengthened supervision of local government debt,the debt sustainability has been enhanced.Chapter 3: An analysis and prediction of variables other than debt.The paper finds that China's economic growth rate downturn is obvious,local government tax revenue and land transfer income growth rate are slowing down and central transfer payment ratio is declining as well.Besides,the linear increase in fiscal expenditure and the general fiscal primary deficit are not conducive to debt sustainability.Chapter 4: Empirical analysis.The paper estimates debt limit for each local government through Fiscal Response Function.The result shows that debt limits of local governments are between(76.40%,96.76%).Hainan,Tibet,Qinghai and Ningxia have “Reserve Channels” so their debt limit is 0.The local government experience “Fiscal Fatigue” after the debt burden ratio beyond 63.03%.Therefore,this value can be used as the “Warning Line” standard for local government.After obtaining the debt limits of all local government,a forward-looking analysis of changes of debt burden ratio under the debt policy is applied.Simulates the decline in economic growth rate,the decline in transfer payment ratio,and the increase in debt average intrest rate and these three combinations.The analysis results show that as long as the economic situation does not come to the unfavorable situation,although the rest situations have unsustainable debt in some local government,the national local government debt sustainability can be achieved through horizontal transfer between regions.Based on relatively unfavorable and unfavorable situations,the national and regional debt policy limits are measured.As long as the national primary balance(deficit)ratio does not exceed(1.06%,1.45%)and(0.37%,0.49%),it will not exceed “Warning Line” criteria and the debt limit in both relatively unfavorable and unfavorable situations.Chapter 5: Policy recommendations.Proposes the policy recommendations to enhance the sustainability of local government debt from three dimensions of fiscal revenue,expenditure and debt management based on the previous research conclusions,combined with the actual situation of China and drawing on the successful experience of foreign countries.