A Research On Chinese Local Governments Debt Scientific Management

Under China’s current laws, local governments are not allowed to borrow money on their own. But the actual situation is that over the past30years since the reform and opening-up policy was adopted, local governments have incurred a large amount of debt under various names. In2009, to deal with the global financial crisis and implement the central government’s4-trillion-yuan investment plan, local governments under provincial level established financing platform companies and ran up a large sum of new debt when their past obligations were not paid off. According to the National Audit Office (NAO), local governments’debt reached10.717491trillion yuan at the end of2010, of which4.971068trillion yuan were raised via6,576financing vehicles set up by provincial, municipal and county-level governments. At the same time, mal-management problems, such as lack of transparency of local government debt, unclear debt repayment obligations and multiple management, lead to some financial risks. Given the unfolding global financial crisis, sovereign debt crisis broke out in some countries from Iceland to Dubai and their sovereign credit ratings continued to worsen. Against such a background, how to dodge risks and step up local government debt management have become important topics of great concern in the financial practical and theoretical fields.After making a comparative analysis of local government debt management systems in the United States, Canada, Japan and Australia, the current dissertation concluded the common characteristics of local government debt management in foreign countries and put forward suggestions for improving China’s local government debt management in the following five aspects:first, revising the Budge Law and related laws to entitle local governments to borrow money; second, setting up a local government debt management system with the combination of institutional constraints and administrative approvals by drawing on experiences from the U.S. and Japan; third, establishing and improving specialized debt management institutions to provide organizational guarantee for strengthening local government debt management; fourth, establishing and improving the local government debt management system with the focus on regulating fund operation procedures; fifth, setting up a local government debt risk prevention and control mechanism with the breakthrough on promoting debt information transparency.Guided by the fiscal decentralization theory, principal-agent theory and power restriction theory, the study, based on the analysis of relevant concepts of local government debt, proposed the definition of scientific management of local government debt, and analyzed its content and basic traits in five aspects of the guiding principle, value goals, functions, system and mechanism, and ways and means together with its significance. In the meantime, the paper pointed out major problems in current local government debt management and presented the general idea and policy advice for promoting scientific management of local government debt.First, stepping up institutional building and establishing a thorough scientific management system of local government debt. The study divided the scientific management system into five sub-systems:debt plan approval system, debt fund raising system, debt operation monitoring system, debt risk prevention and control system, and debt information processing system. The paper analyzed the functions of the five inter-correlated sub-systems which form a closed-loop inter-coordinated system with comprehensive functions and high efficiency.Second, working on self-improvement and laying a solid foundation for the scientific management system of local government debt. The management system consists of six factors:a scientific management theory, a sound operation mechanism, complete rules and regulations, advanced science and technology, a highly-efficient organization and high-quality working staff. Promoting scientific management of local government debt should start with the six factors to enhance each elementary task of debt management.Third, strengthening top-level design and creating a favorable external environment for scientific management of local government debt. This can be achieved in the following five aspects:accelerating the revision of the Budget Law and the Security Law and formulating the Local Government Debt Law to promote the construction of legal system of local government debt management, pressing ahead with reform of the fiscal and taxation system and establishing and improving the mechanism for ensuring basic funding for local governments, clearing the stock of local government debt and establishing and improving the local government debt dissolving mechanism, pressing ahead with reform of the financial system and establishing and improving the local government debt financing mechanism, making innovations in assessing achievements of government officials and accelerating the shift of local government functions. The improvement of the external environment in the above five aspects is the precondition for advancing the scientific management level of local government debt.