Risk Management Of Chinese Local Government Debt

The risk of government debt is a latent danger to the stability and development of the world economy. The risk of China’s government debt consists in local government entirely. Since2009, China’s local government debt risk has caused widespread public ignorance, because the local government debt scale reached1.07billion by the end of2010. The scope is run up to1.79billion by late June2013. The views of economic crisis causing by local debt disk are made by some scholars vigorously. By the constraints of the Budget Law of China, the local government cannot meet their investment needs by issuing debt. In order to solve the problem of increasing fiscal expenditure, the local government financed loan growth by various funding sources, and the scale of local government debt is continually expanding. The lack of effective supervision and guarantee mechanism in the case of repayment has formed the tremendous debt risks. Local government debt risk will cause worst crisis on China’s economy without management.Devoting to the risk management of local government debt, this paper makes a comprehensive analysis on the total amount and the risk of local government debt, and the causes of the debts local governments incurred firstly. The accumulation of sub-national debt venture for many years, especially after the tax reform in1994, due to the ever-inereasing of local fiscal expenditure, hence, local government debt appears rapid growth. The scale of debt has soared in response to the two international financial crisises. The overall risk is controllable through the assessment of the scale, structure and management of debt, but there remain certain debt risks. By the analysis of fiscal decentralization theory, risk of Chinese local authorities debt is due to local government revenues are not enough to complete its expenditure responsibilities; the relation of state and local authorities lack the protection of legal; there is a contradiction between the financial system and government administration system. According to the perspective of public choice theory, the formation of the debt risk is grow out of the government as economic man debt will be ignored; the lack of effective decision-making mechanism of borrowing constraint; conflict of interests and power distribution of different levels of government. On the basis of the analysis of the principal-agent theory. the public and financial institutions and other creditors of the problem leads to the emergence of local government debt risk, following the principal-agent relationship in the central government and local government.The construction of the debt risk management system needs to draw lessons from international experience. This paper studies the characteristics of different modes on local government debt management from different countries. Four modes can be summed up which include the market constraints, institutional constraints, common management, and administrative control. According to the debt risk control process, we clean up and gather the various countries’policies and measures from three aspects including the prior rule, the matter of supervision, and the event handling mechanism after the crisis and the bankruptcy mechanism.The risk management of local government debt of our reference: how to build the management system of local government debt risk effectively; improve the system environment, debt risk management; cultivate the debt risk management market environment.According to the present situation of local government debt management in China and learning from international experience, we can draw the conclusions:in order to prevent and resolve the risks of local government debts, we shall establish and develope the local government debt management system, and consummate the system of local government debt risk management and the market environment. The local government debt risk management system including the debt risk management mechanism, debt risk early warning mechanism, debt repayment guarantee mechanism, and debt supervision mechanism. The construction of institutional environment of local government debt risk management including strengthening local government debt management organization system, the legal system of local government debt management, implementing the reform of government accounting system, improve the government’s asset liability system of information disclosure. The construction of the local government debt risk management market environment includes establishing perfect credit rating system, and increasing the service of local government bond insurance.