A Study On The Legal Regulation Of Local Government Debt Financing In China

Subnational government debt financing refers to the behavior of a subnational government taking advantage of government credit to issue bonds or loans to raise revenue,and commitment to the repayment of principal and interest due. The essence of subnational government financing is government’s fiscal revenue and expenditure behavior. So it should be incorporated into the legal constraints and regulations. But in reality the government takes all methods to circumvent the budget law and fiscal rules. In the acquisition of construction funds,the subnational government has accumulated large number of hidden debt. While China’s “budget law” only simply indicates that a subnational government could issue bonds,it still lacks legal framework and specific rules about subnational government debt financing. Aiming at dealing with this problem,this thesis discusses how to grant the right to subnational government of debt financing,what kind of restrictions should be imposed,how to prevent the risk of debt financing.There’s necessity for subnational governments to raise fund though debt financing. The theory of public goods in economics,the theory of bond financing and the theory of fiscal decentralization indicate that a subnational government provides regional public products more efficiently than the central government,and the subnational government has the responsibility of providing regional public goods. When the local fiscal revenue is insufficient, a subnational government prefers to raise funds for construction through borrowing. The subnational government debt financing includes bank loans and bond issuance. Unconstrained debt financing has brought about huge debt risk. The motivation behind the debt risk is related to the public pool, soft budget constraint and the completion between regions. Moreover all these problems are related to the mismatching between financial right and responsibilities of subnational governments in the process of incompletely fiscal decentralization. In addition,the evaluation mechanism of subnational government and the central government macro-control have prompted the subnational government to conduct debt financing.Other countries’ legal regulations provide valuable references for China’s establishment of the subnational government debt financing legal norm. Brazil through the Fiscal Responsibility Law to resolve the debt crisis,America regulates and supervises the municipal bonds issuance and exchange from the perspective of marketization. And Japan through bond issuance examination and approval system control the subnational government debt financing. In China,the short-term goal of subnational government debt financing is to clear debt and control the debt risk, while the long term objective is to establish sustainable mechanism of sustainable mechanism subnational government debt financing. In order to control the subnational government debt financing,there are four different patterns in the world, including market control mechanism,administrative control pattern,law control pattern and cooperative arrangement pattern. Each pattern has advantages and disadvantages. China right now employs the administrative control pattern,and finally it should develop a control mechanism that relies mainly on legal control mechanism while take administrative control mechanism and market control mechanism as secondary reliance. On this basis, the legal authorization principles,the budget governance principles and the superior government restraint principles and public benefit maximum principles should be established as the basic principles of subnational government debt financing.Although the State Council and the relevant departments have issued a number of files to cleanup subnational government debt and to consolidate subnational government financing platform,these policies lack stability and coercive force, long legal mechanism hasn’t be established. Establishing Fiscal Responsibility Law by which it shall establish ex-ante and ex-post mechanism to regulate subnational borrowing will be of great importance in establishing a legal control mechanism on subnational borrowing risk. Besides,it’s also necessary to establish the rules on the liability of subnational borrowing and the constraint on the subnational government borrowing.To establish a normative and orderly system of subnational government borrowing,it is necessary to improve the system of fiscal decentralization, to clarify the relationship between government and market, to define subnational government’s responsibility and grant them the matching fiscal rights correspondent to their responsibility. Moreover,in addition to the supervision by the higher level of governments,the budget supervision and government information publicity system will form the supervision and restriction by the local people’s Congress and the public on the subnational government borrowing. And the improvement of the subnational government credit rating system will be helpful to form a transparent market financing mechanism.