A Basic Framework Of Local Public Debt Risk Management

The financial power is upward concentration and responsibilities are downward after the tax distribution reforming, resulting in local financial authority and responsibilities mismatched seriously. In the great wave of urbanization, the local governments have to establish state-owned companies as government financing platform with pooling of resources, so as to fill the construction funds gap, which can avoid policy constraints that local governments are not allowed to borrow money effectively. With the supplying of "soft loans" by policy banks, such as the State Development Bank, policy banks have provided effective ways to financing for local government. As long as there are projects, debt can be rolling, "Development Finance" will become more and more popular. Especially in the beginning of 2009, the state is encouraging local governments to establish financing platform and expand investment funding through debt financing, as a response to the international financial crisis. In order to play a more effective role, the central government is to issue bonds on behalf of the local government. After proposing 4 trillion construction scheme by central government, the debt scale of local government is increasing to 7 trillion in less than one year's time. However, the debt scale is expanding so rapidly that may pose a threat to social credit system and even the national economy. Thus, this problem has become one of the most important issues to preventing the local public debt risk for policy-makers.At present, there are lots of practices and theoretical literatures about public debt risk around the world, but lack of comprehensive, systematic, standardized research. This paper is basing on the practices for a local government risk management, combining qualitative analysis and quantitative analysis, integrating historical analysis and future development trend analysis, to establish a basic framework for local public debt risk management.With an outline of this article, which contain 11 chapters, as follows.At the beginning, give an introduction. This chapter is basing on public economic theory; put forward the necessity of financing for public construction investment for local government. Secondly, analyzing the history, reality and prospects of public construction for development zone, and finding the contradiction between supply and demand for investment and financing. Thus, it put forward the plan for future financing of public construction reasonably and scientifically. At the same time, emphasizing the importance of risk management using macro-financial engineering technology in development zone.Chapter 1 is literature review. This article makes a summarize of the relevant theory, that is relating to public economic theory, macro-financial engineering theory, financial risk theory, capital structure theory, asset pricing theory and public debt theory and so on, so that to provide foundation supports for the research of public financing of sustainable development in Wuhan Economic and Technological Development Zone.Chapter 2 analyzes construction results and the forecast of future cash flow. It shows that public debt has played an irreplaceable role, the construction need more funding that ask for more debt, so as to balance the debt financing gap. Moreover, it makes a brief analysis supply and demand for future projects construction funds.Chapter 3 analyzes the basic framework for local public debt risk management; it involved the research of the infrastructure projects construction and its corresponding local public funding needs. We discussed the supply of public construction funding based on local revenue, the fiscal system and transfer payment system. Moreover, calculating the appropriate scale of public debt based on actual growth of local financial resources. For the system of local public debt risk management, it contains risk identification, risk assessment and risk control, promote the development of the local pillar sources, then put forward a constructive programs for debt risk management.Chapter 4 studies on the relationship between economic growth and public revenue. Public revenue is closely related to economic growth, finance need to obtain income through economic growth. The higher levels of economic development, the more gross national product, and more revenue; and financial revenue play a great role to promote economic growth and government functions and social stability. This chapter makes a comprehensive analysis of economic growth, optimization of tax revenue sources and the financial management system, so as to explore key factors of public debt risk management factors, and achieve sustained steady growth for local revenue.Chapter 5 is empirical studying on public revenue growth. In the period of time, the scale of revenue is usually affected by several factors, such as the level of economic development, social investment, the level of foreign trade. In this paper, the level of economic is measured by regional GDP, industrial output, agricultural output,. the level of social investment zones is reflected by the total investment in fixed assets, the level of development zones is measured by total volume of foreign trade. Study found that fixed-asset investment and industrial output is closely related to the public revenue, and the industrial output is more significant, which is consistent with the reality in Wuhan economic and technological development Zone.Chapter 6 analyzes the stock risk of public debt. There are two aspects for the risk of existing public debt. First, repayment ability is supported by the existing stock land; second, it is due to financial self-financing. The research shows that the existing stock of public debt is out of risk, the value of land can overwrite the existing scale of loans. Meanwhile, the financial self-return debt principal and interest due each year in future ability to strong, the stock of debt is not risk zone.Chapter 7 studies on the proper scale of local public debt with constraint of total fiscal revenue. The empirical study is based on the analysis of historical data and the future forecasted data, and estimates the most proper size of development zone's debt. However, there are some shortages, which the finance of development zone play roles of constructive one as well as financial one,75 percent of revenue contribution pays to the central government. But such research can be found, if not subject to the limitations of the financial system, the proper debt scale of public construction may eventually only a theoretical value.Chapter 8 studies on the proper scale of local public debt with constraint of fiscal revenue of development zone. With the constraints of local revenues account for only 25percent of total fiscal revenue, used for 100% of total fiscal revenue of the public infrastructure, lead to establish the platform through finance companies and borrow money to make up for lack of construction funds. With the behavior of betting on future local option income for public debt, how to meet future funding needs, to achieve balance between supply and demand of public construction funds. How the optimize capital structure in accordance with the conditions, reasonable arrangements for the debt amount and duration to achieve sub-optimal structure of public debt, balanced funds, risk control. This chapter focuses on these issues.Chapter 9 is researching on the management of public debt risk. It concludes public risk identification, risk assessment and risk control techniques, which is a cyclic process. In a set of basic framework, it should be timely given dynamic adjustment, In accordance with the principle of scientific coordinated development, we could be optimizing industrial structure, transforming economic growth mode, developing the secondary industry inertial, using new ideas for developing the tertiary industry, and fostering local sources of revenue, to enhance the local financial strength, and build a fairness, sustained an coordinated system of revenue resources management. Once the government debt attaining a larger-scale, we need to establish the scale controlling system to prevent financial risk and wider range of public risk lead by excessive liabilities.Chapter 10 is the conclusions and recommendations. Strengthening public debt risk management, and promoting sustainable development for public construction financing, it is necessary to adhere to debt investment, so that to promote economic growth and the sustainable financing development, and insist on an appropriate scale debt to ensure sound and fast development of local economy. Meanwhile, this paper takes a example of Wuhan economic and technological development zone that has used series of security measures for promoting the economic growth in 2009 and 2010, such as coordinated the relationship between economic and social interests of various aspects, which play a important role in the public debt risk management system, and form join forces to promote economic development. It is achieving maximum effect of economic development, realizing optimization of the investment density, GDP contribution, revenue maximization, and the minimization of public debt risk during the process.