A Study On Endogenous Mechanism Of China Soft Budget Constraint

With multi-pronged approachs, say the transformation of government functions, the liberation of the shackles of financial markets, the reform of the enterprise system, China's reform, during the past thirty years, brings brilliant achievements. However, the reform is not easy, is a constantly changing process. In front of the trade-offs of interest, the government, banks and enterprises restrict each other in the reform, and form their own behavioral mechanisms according to their own status and environment around, which make incentives distortion still exist, and lead to soft budget constraints the phenomenon still remaining. More importantly, under the new framework of the system resulting from reform, the economic relationships between the participants face a significant change, and thus lead to the internal formation mechanism of soft budget constraint changing too. Especially during the thirty years'reform, we have abandoned the planned economy in which all economic actors are unavoidably under government's control, through the improvement of laws and regulations, reform of the enterprise system and the commercial banking system, so the enterprises and banks gradually get independent operation right in the current context, and the government's direct intervention ability in banks'and firms' operation is greatly diminished. But due to government's control over lots of economic resources, the government will still possess the indirect intervention ability by giving companies and banks subsidies to influence the banks'and firms'internal incentives and correspondingly their behavior mechanism. Therefore, in the new framework of economy, based on the new behavior objectives and constraints of government, banks and companies to analyze the relation between government, enterprises and banks and their motivation is the key to break the current Chinese enterprise soft budget constraint problem, and will provide useful ideas for a comprehensive deepening reform in front of China now. Through research we found:Indirect government intervention can effectively influence firm's behavior which is given autonomy to manage their business. In order to maximize their own interests, they are keen to establish political relationship with government, but political relationship does not bring efficiency to enhance business but bring incentive distortions. More seriously, it is this efficiency distortions caused by the indirect government intervention can not rely on a sound competitive environment to completely correct, so we prove that there is a "support-inefficient" vicious cycle between government and enterprises, and we proof the government's motive as a budget constraint support organization as well.As for the other budget constraint support organization-the bank which also get the right to operate independent through reforms, we found with the indirect government intervention, the bank will always support the government's favorite projects and give them credit resources inclination, so that the projects have a greater chance to get credit resources. Especially when there is adverse selection, the government's support for the project will make the projects in favor of avoiding credit rationing; Furthermore, we find that when the supported project's net income is negative, such projects will get credit support because of government's support. We prove that with indirect government intervention the profit-maximizing commercial banks will also be support organization for the support of budget constraints.In addition, different from general business, because the presence of regulatory means, say implicit deposit insurance system, the bank will get the full amount of the risk subsidies from government, and subsidies imposed by the government itself is a powerful intervention tool for bank. But take explicit deposit insurance system and other market-oriented banking regulation tools while correct the government intervention distortion, also face the risk of regulatory failure which will cause serious banking crisis. By introducing transparency and competition the two key industry factors, we establish a bank regulation regional distribution and define the regulatory feasible region and regulations failure region. We prove that:in the feasible region, if information transparency is high, the fair pricing explicit deposit insurance system is optimal; and if transparency is low, implicit deposit insurance system is still the best choice. In particular, for the soft budget constraints we believe that the government's policy of selection is the result of trade-offs, and in different regulation feasible region the optimal deposit insurance system can effectively alleviate the banks' excessive risk-taking problem in order to avoid excessive banking crisis correspondingly. Therefore, when business environment does not have the proper conditions the government implemented implicit deposit insurance system and give banks risk subsidy is the optimal choice. But on the other hand it proved the necessity of market-oriented reforms, because when the industry to enhance the quality of the environment then eliminating subsidies to banks will be the optimal choice of the government, and then the bank's motivation as budget constraints support will greatly weaken, soft budget will be to solve the problem fundamentally then. In addition, we also give the optimal withdrawal mechanism for troubled banks which are in the regulation failure region, and prove the micro-mechanism from the banks' risk-taking behavior perspective to explain the formation of the banking crisis.