The Research On Credit Risk And Transformation Development Of China's LGFVs

Since 2010,China has introduced a series of policies to regulate the Local Government Financing Vehicles(LGFVs).The implementation of the new "Budget Law" conditionally allows the provincial local government to finance by way of issuing bonds,and forbids borrowing in other ways.The document([2014] No.43)clearly stipulated that "the LGFVs should strip the financing functions from government,and may not add government debt." Next,the Ministry of Finance issued the document([2014] No.351),requiring that local government debt as of December 31,2014 should be classified and screened,and put into the budget management,the government debt should be locked,and the size of local government debt should only be increased.Since 2015,the Ministry of Finance has repeatedly stated that debt of LGFVs does not belong to local government debt.On the surface,these debts are the debt of LGFVs themselves,but in fact,a considerable part of these debts are financed with local government credit,and local governments also support them through illegal guarantees.Once these debts cannot be repaid in the future,these hidden liabilities will be transformed into a financial burden.In this case,the control of debt of LGFVs and promotion of LGFVs transformation development,have become the key to control the recessive debt of local government.However,in the current economic situation,LGFVs transformation development still faces many problems,these include: economic downward pressure increases,the government still rely on LGFVs for infrastructure construction investments;the tax reform is not fully in place,local financial imbalances are still not improved;and LGFVs are in such a big number,and their internal driving force for transformation is not strong enough,all those problems limit the transformation of LGFVs.Therefore,the future road of the transformation of LGFVs is still tough and long,and it needs more research and discussion.Studying the sustainable development path of LGPVs has profound theoretical and practical significance to deepen the reform of China's financial investment and financing system,and to speed up urban construction and drive the whole economy.This paper analyzes the current situation of the LGPVs from the background and development process in our country and the current policy.Although the LGPVs are required for transformation,the local financing platform is still borrowing government credit for debt,and debt size has not been effectively controlled,mainly because the relationship between LGPVs and local government is not fully clarified.In order to illustrate this point,this paper researches the credit level of the LGPVs issuing bonds after 2015,and analyzes the operation status of LGPVs and its influencing factors.The results show that the financial strength of the government and its financial support to LGPVs are the key to solvency of LGPVs.In this case,the paper analyzes the problems existing in the operation of the LGPVs,points out the main obstacles and existing problems in the transformation of LGPVs,and puts forward some policy suggestions on the transformation and development.The main innovations and breakthrough points of this paper are:(1)A total of 928 LGPVs issuing bonds between 2015 and October 2016 are used as samples.The number of sample LGPVs is relatively large and covered comprehensively and extensively,covering 31 provinces(autonomous regions and municipalities)as well as provincial,municipal and county-level.Using empirical analysis and quantitative analysis,this paper finds that LGPVs' debt repayment is still mainly dependent on the support of local governments after 2015.(2)From the external rating and market point of view to analyze the credit level of LGPVs and its adjustments,higher credit rating for LGPVs is due to the local government's strong support.Local governments' willingness and intensity of support for LGPVs is still strong and validated by constructing an empirical model.(3)In terms of policy recommendations:The key to the transformation of current LGFVs is to clarify the relationship with the government.Different LGFVs should take different paths to the transition arrangements based on the different business characteristics and different regions.Governments should clean up the shell-type LGFVs,and promote the transformation and market-oriented development for those LGFVs who meet the conditions of market-oriented transformation and manage reference to public interest and commercial state-owned enterprises.In the process of transformation,the LGFVs should strengthen the regulation of their operation,realize the separation of government and enterprises,perfect the corporate governance,strengthen the market-oriented consciousness,enhance their own competitiveness,innovate their development mode,and focus on resolving and preventing their own debt risks.At the same time,Deep reforms should also be undertaken on the fiscal and taxation system and investment and financing system.This article is divided into nine chapters:Chapter 1 is the introduction,which mainly elaborates the background,the research significance,the research mentality and the research method,the main research content and the innovation of the research.Chapter 2 is the literature review part,which mainly combs and introduces the current domestic and foreign latest research on the local financing theory and LGFVs.Chapter 3 is the theoretical basis,which mainly introduces the financial theory,corporate governance and risk management of LGFVs credit risk and transformation and development.Chapter 4 analyzes the present situation of the LGFVs,which mainly introduces the basic concept,the main characteristic,the operation mechanism,the main background and the reason.Then,this chapter analyzes the situation of the LGFVs after 2015,as well as the reasons why LGFVs debt has not been effectively controlled.Chapter 5 analyzes the credit status of the financing platform from the perspective of operation and finance by the comprehensive and detailed analysis of their operation ability on 928 LGFVs issuing bonds between 2015 and October 2016.The scale of assets of the LGFVs is generally large,but the overall quality is poor.The own profitability of the LGFVs is weak,and the main source of income is dependent on government subsidies.This shows that the level of government revenue and government financial support to the LGFVs are the key to determine the debt repayment ability of the LGFVs.Chapter 6 analyzes the credit status of the LGFVs from the perspective of government support.This chapter mainly analyzes the strength of local government from the aspects of economic strength,financial strength,debt situation and debt burden.With respect to the absolute scale of debt,the current local government debt scale is huge,the debt risk is higher,the potential risk cannot be ignored.However,the relative debt ratio(debt balance / GDP)of government debt in 2015 is 38.9%,and the local government debt rate(debt balance /comprehensive financial resources)is 89.2%.Compared with China's economic strength and growth potential,China's local debt risk is still in a controlled state.Due to the differences in economic strength,the pace of development and the debt situation and so on,Debt burdens and risks between provinces have clearly diverged.Chapter 7 analyzes the overall credit situation of the LGFVs from the credit rating point of view.Firstly,the paper puts forward the rating method of the LGFVs by taking the rating method of the LGFVs of Pengyuan as an example.Then,through analyzing the status,the change of the rating and the market interest rate credit spread of the sample the LGFVs,and comparing with industrial bonds,this chapter analyzes the credit status and its changes of LGFVs.Finally,by building a quantitative model,it further proves that the current the credit level LGFVs is rely on the local government to their support.As a result of the local government's implicit support,the level of credit of the LGFVs as a whole is at a higher level and credit level adjustment is mainly to increase.The overall market recognition of the LGFVs is higher,and compared with industrial companies in the same circumstances the cost of financing for LGFVs has certain advantages.Chapter 8 mainly introduces the main risks faced by the current LGFVs,and analyzes the obstacles and difficulties in the transformation of the LGFVs,Combined with the current case of LGFVs transformation,the main risks include: blurred boundaries between LGFVs and local government,asset quality problems,single financing structure,high debt ratio,high debt risk,investment projects lack of profit,information opaque,operational policy risk and so on.In the future,LGFVs needs transformation and development,that is: complete marketization,continually participation in government project operation,liquidation as an exit strategy.The current LGFVs are also actively explore the transformation paths,and to sum up,there are mainly three models: new urban diversified operation,state-owned financial holding or asset holding mode and the PPP mode operation platform.But overall,LGFVs transformation progress is relatively slow,and the form of transformation is greater than the essence.This is mainly due to mismatch of current local government financial powers and responsibilities and long-term accumulated problems of the LGFVs in the process of the development.Because the fiscal and taxation system reform and the corresponding supporting measures are not fully in place,the LGFVs transition also faces many obstacles and difficulties,restricting the transformation of the LGFVs.Chapter 9 is the part of policy recommendations,which is the core and focus of the paper.Combined with the analysis of the transformation of the current LGFVs,policy recommendations are given as follows: The key to the transformation of current LGFVs is to clarify the relationship with the government;Different LGFVs should take different paths to the transition arrangements based on the different business characteristics and different regions;Governments should clean up the shell-type LGFVs,and promote the transformation and market-oriented development for those LGFVs who meet the conditions of market-oriented transformation and manage reference to public interest and commercial state-owned enterprises,in particular,including: make specialized laws and regulations to regulate the transformation of LGFVs;strictly prohibit adding new LGFVs,significantly reduce the number of existing LGFVs;promote public welfare LGFVs for the transformation of new public enterprises;improve corporate governance structure,establish a sound modern enterprise system;enhance their own strength,reshape their own credit,innovate development model,cultivate market competitiveness,provide business support for the transformation;control the scale of LGFVs financing,focus on the settlement of existing debt,etc.At the same time,it is pointed out that the problem of LGFVs transformation is actually the problem in the local fiscal and taxation system reform and investment and financing system reform.Only by thoroughly solving these problems can governments enhance their enthusiasm and fundamentally promote the transformation of the LGFVs.Therefore,this paper proposes to change the government functions,effectively control the local government investment impulse,deepen the reform of the tax system,improve the balance of local government revenue and expenditure,build local government financing system,combine LGFVs transformation with the reform of state-owned enterprises,in order to build external safeguard measures for LGFVs transformation.