Theoretical Research And System Design Of Municipal Bond Financing In China

In these years, China is facing the biggest challenge since the reform and opening up.The existing problems are various, such as rising inflation, insufficient domestic demandand debt problems of local government. According to statistics of the National Audit Office(NAO), local government had an overall debt of10.7trillion Yuan by the end of2010. Thescale amounts to28%of its GDP and1.5times of total government revenue. To avoid theconstraint of Law of the People's Republic of China, most of local government debt is inthe contact state.The accumulation of local government debt is closely related to the high level ofurbanization. China's fiscal decentralization system is based on tax-separating systemreform in1994, so local infrastructure fund is bear by local government. Since the reformand opening up, China's urbanization level has increased from19.99%in1979to47.5%in2010while urban population has grown from80million in1979to630million in2010.That is to say, if urbanization level increases by1%, then urban population would grow by16million. Calculated by90thousand Yuan per person in average in infrastructure fund,the new expenses of local government reach1.44trillion Yuan every year. Tax-separatingsystem reform in1994is not perfect and it lowers the routine power and raises financialpower. In addition, China's financial transfer payment system is also incomplete. All theseproblems resulted in local government being mired in difficulties. Solving this problemwith appropriate methods as soon as possible has important practical significance.The developed capitalist countries in Europe and America often raise funds by issuingmunicipal bond when they face the problem of insufficient construction capital. TakeAmerica for example, the municipal bond balance is30%of total bond balance in2010.And long term municipal bond is4%of GDP in the same year. In recent years, not onlyhave the developed capitalist countries in Europe and America accelerated the pace ofdevelopment in municipal bond but also some developing countries have tried to developmunicipal bond. The most important financing means of China's local government is also bank loans which rely on local government-backed investment units. According tostatistics of China Banking Regulatory Commission, local government-backed bank loanshave amounted to8.47trillion Yuan by the end of2010. The scale amounts to79%of grossdebt. There is no doubt that large amount of bank loans pouring into localgovernment-backed investment units is resource-wasting. Furthermore, it is also a timebomb for China's financial order.So, the key to solve our local government existing implicit debt is "dredge" instead of"blockage". Owing to fiscal decentralization theory, the main provider of local publicgoods is local government. We should give our local government appropriate debt rightswith further improvement of tax sharing reform. Fortunately, our government has startedeffectively attempts, for example, central government had issued local government bond in2009and permitted Shanghai, Shenzhen, Zhejiang province, Guangdong province to issuemunicipal bond in2011, all of these can accumulate valuable experience for ourgovernment to issue municipal bond. It is the high time to modify <the budget act> andverify the legitimacy of local government's debt right, and then we must solve the problemthat is eligible to issue municipal bonds through a valid scientific criterion. Of course, thewell-functioning and healthy municipal bond market also depends on the establishment ofa comprehensive system. So we had better learn the experience of western countries andsome developing countries. After that, we go on Exploring issuing system, managementsystem, pricing system, circulation system and reimbursement system, and proposing a setof suitable arrangement for the municipal bond in our country in the light of china'sspecific situation. When relaxing the prohibition of municipal bond, we must focus ourattention on the prevention and control of risk, especially credit risk which is the corn of allrisks. Therefore, this paper also carried out a detailed analysis of the control andmanagement of the credit risk faced by municipal bond.