The Research On Avoiding The Risk Of China Local Financing Platform Using Municipal Bond Financing

According to the data disclosed by the People’s Bank of China in September2011, total asset of more than3,800local government fund vehicals (LGFVs) is800million yuan, and the local government debt has reached5.2trillion yuan. Though LGFVs is an indispensable force for China’s economic construction, it contains a large financial risk because of the ultra-high-liability ratio, illegal guarantee commitment, the lack of project capital and low solvency of projects. And stop lending to local governments will lead to many unfinished projects, which would trigger local government debt risk. Therefore, to search for scientific and reasonable financing tools, actively to expend financing channels, to change the financing structure of local government which funds rely mainly on selling lands, and to form multiple financing structures to resolve risks, are increasingly becoming the focus of the government, practitioners and theorists.To build a convincing theoretical framework, the paper aims to take a combination of quantitative and qualitative analysis, empirical research and statistical analysis, and comparative and systematic analysis, based on China’s specific conditions, in which I analyz the risk of LGFVs, and assess the scientificity and rationality of government’s bond financing, and then I put forward policy recommendations for the development of LGFVs and provide valuable information to the government.The paper is made up of seven parts. The first part is introductory theory, and the other parts are as follows:The second part is literature review, which I review and make commnents on the literatures home and abroad in chronological order. First, I took the traditional theory of national public debt as a starting point, and then summarized theories from developed countries to analyze their successful experiences and shortcomings.Based on which, I focus on the "Game Rules" and policy related to the LGFVs. Second, I reviewed the theories and achivements from domestic scholars on LGFVs.The third part concerns summarizing and learning successful experience from foreign municipal financing experience. I summarized the successful experience of the United States and Japan on municipal financing, and then furthur strudied the experiences from Asian countries-South Korea. Based on the studies, I analyzed the municipal bond financing situation systematically, which provides a broad perspective and a good framework guidelines for further study.The forth part is about studying the issuance of municipal bonds and debt repayment mechanism theoretically and empirically. First, I established a analytical framewok on securities design theory; then explored the optimal choice of the LGFVs from the perspective of asymmetric information and symmetric information respectively. Second, in accordance with the actual situation in China, I analyzed release mode, the main issue, issue type, distribution methods and other issues of China’s local government bonds. Finally, I designed a scientific mechanism of local government debt security in the principle of income risk.The fifth part pays attentions to municipal bond pricing issue. First of all, I analyzed the three factors, including macroeconomy, industry and risk, which affect pricing bonds. Secondly, I studied the term structure theories of municipal bonds, and then constructed and verified a municipal bond pricing model. Finally, I did the regression analysis by putting the data of Jiangsu province into the model, and calculated the reasonable debt scale.The sixth part studies the credit risk and market regulations of municipal bond. I built the municipal bond credit risk analysis system based on the KMV model, after studying the bond valuation and carrying out empirical analysis based on the data from Jiangsu Province. At the same time, I took up the successful experiences of the United States’s governments and agencies on municipal bond rating, and studied how to construct China’s municipal bond market supervision system, to put forward to build our country municipal bond credit rating policy recommendations.The last part tells the policy suggestions. It is a systematic project to address the risk of LGFVs. Starting from the market mechanism of LGFVs; the paper firstly systematically studies the issuing and pricing the municipal bond and has put forward feasible policy suggestions on improving the credit risk and strengthening the market supervision system.