Institutional Environment And Debt Financing Of Local Government

In China,local government debt and its associated risk have become the focus of social concern.Effective identification and control of the risk of local government debt plays a key role in avoiding debt crisis and therefore guarding against fiscal and macro financial risk.However,much of the attention has been paid to the scale of local government debt when all sections of society do the evaluation.They tend to ignore the cost of issuing debt,so debt was issued blindly and high risk as well as significant costs resulted from huge repayment pressure were brought to the government.In preventing and controling the debt risk,attention should not only be paid to the risk of debt scale,but also to the debt repayment capacity.Meanwhile,the key to solve the problem of local government debt lies in restraining excessive financing impulse of local government under soft budget constraint,and instructing local government to make reasonable investment based on market-driven capital cost.By optimizing investment efficiency of local government through shaping market pricing system of local government debt,local government investment efficiency will be improved.Therefore,debt financing cost becomes an important factor for preventing and controlling risk of local debt.At present,local government debt is more likely to be accumulated by the result of financing carried out by local government financing platform through different ways,among which the main way used to be borrowing money from banks through the financing platforms.But along with the government clearing the loan of financing platform,banks have been regulating the loan scale gradually in recent two years.In the meantime,due to the relatively high financing cost of trust products,financing platform companies tend to finance by releasing enterprise bonds like city investment,thus the capital raised by releasing city investment bonds has become the main source of local government debt financing.Therefore,this study discusses the influence on the scale and risk of local government debt financing by the institutional factors.Meanwhile,it selects city investment debt as the breakthrough point of the research to discuss the cost of local government debt financing and its risk issue,which has certain theoretical value and practical significance.This study is mainly based on the public fiduciary duty theory and asymmetric information theory and probes into the influence of various system environment aspects on local government debt financing scale as well as specific effect and function path of the risk and cost.The study method combining normative research with empirical research is applied.First of all,it combines literature review with theoretical analysis,and sorts out the key influence factors of local government debt financing and its mechanism of cost effect by analyzing the system background.Second,it discusses the influence of fiscal decentralization,fiscal transparency and other regulation on local government debt financing scale and risks.Then,this paper selects the data of provincial government(include provinces,autonomous districts,municipalities)during the period of 2006-2012 as a sample,collects the related data of the city's debt,selects the total index of financial ecological environment and the two-dimensions data of regional economic foundation and government governance level of the region.At the same time,it chooses the relevant variables of the government finance information disclosure at the provincial level to test the influential effect and its degree of environmental factors of all kinds of systems on local government debt financing cost.Finaly,the author draws the following conclusions:(1)Under the circumstance of Chinese regulations,there is a positive effect between fiscal decentralization and financing scale of governments.That is to say,if other factors are controlled,the more powerful the fiscal of local governments is,the larger local government debt financing scale will be.On one hand,since the reform of the finance and tax system,fiscal power and executive power sometimes still disaccord,and government receipts cannot meet the need of expenses of executive power,so it is inevitable that local governments loan from financing platforms.Meanwhile,there is positive correlation between fiscal decentralization and the risk of local government financing.The Chinese fiscal affairs transparency level is still relatively low,and the transparency level gaps between different provincial class governments are still large,the fiscal information exposure is very low,while under the situation that other factors are controlled,the higher local fiscal affairs transparency level is,the lower local government debt financing scale gets.Based on the commission-agency theory and signal transmission theory,high fiscal transparency scores demonstrates that the government would dare to reveal its own assets and liabilities and other fiscal information,and it would become easier for the government to be supervised by taxpayers and investors,which makes the government officials greatly convergence their behavior of expanding debt scale without restraint,and naturally reduces financing scale and therefore reduces the risks of failing to pay the due debt.(2)Significant local differences presented in our country's financial ecological environment lead to differences in the financial conditions of various regions,directly affecting the availability and cost of local financing.The better the financial ecological environment is,the lower the financing cost of local government debt is.At the same time,the four aspects' indicators that are put forward to evaluate ecological environment of local finance according to typical characteristics of government-dominated economic development in transition economy,may include local government governance,regional economic foundation,local financial development and culture of system and credit.Among the four indicators,regional economic foundation and government governance level show remarkable effects on reducing the financing cost of local government debt.Regional economic foundation has remarkable influential effect on local government debt financing cost.While under the circumstance that other factors are under control,the better the regional economic foundation is,the lower the local government debt financing cost gets;Besides,the degree of fiscal decentralization further strengthens the effect of economic foundation on reducing the local government debt financing cost,which means when other factors are constant,the higher the degree of fiscal decentralization is,the more significant the effect of economic foundation on lowering local government debt financing cost is.High economic level,optimized economic structure,favorable development environment of private departments and other related factors serve for improving the quality of local economic development and make the development more acceptable and trustable to the public.In this case,the investors won't require excessive yield rate for urban construction investment bonds issued in this area to lower financing cost;At the same time,in view of the background of tax-sharing system,high degree of fiscal decentralization means that the province has solid economic foundation and rich controllable resources.As a result,the effect of economic foundation on lowering the debt financing cost would be further strengthened.The government governance serves as the necessary foundation of a steady financial ecological environment.Government governance level and the cost of local government debt financing are obviously negatively correlated,which means that government governance level could efficiently lower the local government debt financing cost;But when the legal environment is more consummate,the effect of the government governance on lowering the financing cost would be relatively more insignificant.In the meantime,it is found by empirical test that the fixed-asset investment is positively associated with debt financing cost.That is,the larger the fixed-asset investment is,the more demand for funds it generates.When the supply of funds does not change much,the financing cost in the markets would increase.Besides,the economic structure is significantly and positively correlated with the financing cost.This is because the higher the proportion of the primary and secondary industries is,the lower the degree of economic activity would be,which would depress the velocity of currency circulation,and thus have an indirect impact on money supply and push the financing cost higher.In particular,the proportion of the primary industry has the largest effect on financing cost.(3)The fiscal transparency level of China is still relatively low,but it is showing an upward trend.Meanwhile,there still exist considerable gap of fiscal transparency level among different provincial-level governments.Fiscal transparency,as a fame signal of the government finance information disclosure,has a certain influence on the cost of local government debt financing.Empirical tests indicate that the transparency level of fiscal affairs has remarkable negative correlation with the cost of local government debt financing,namely the higher transparency level of fiscal affairs is,the lower debt financing cost would get.Based on the signal transmission theory,high level of fiscal transparency means that the government dares to disclosure its assets and liabilities with other fiscal information.In this case,the decrease of future default risk would naturally brings about lower financing cost.After adding the variable of governmental intervention level into consideration,the effect of fiscal transparency on lowering the local government debt financing cost is weakened.This is because the higher governmental intervention level will weaken the influence of the fiscal information transparency on the debt financing cost under signal sending mechanism.Through theoretical and empirical analysis,this paper provides insights on how to regulate government debt financing behavior and prevent government debt risk,improve government fiscal transparency and promote government accounting reform,as well as to speed up market-oriented government debt issuance and set up standard local government financing mechanism.First,by determining debt financing channels,fund using scope,and debt repayment sources,local government will be motivated to reasonably arrange income and payment,reduce the motivation and ability of aggressive debt issuance,and effectively control the scale and risk of local government debt.Second,reasonable division of government functions,properly handling the relationship between the government and the market,and improving financial ecosystem construction as well as setting up a market system for local government debt financing,transaction and risk pricing,will be important ways to manage and regulate local government debt.Third,promoting government accounting reform requires building up and improving government accounting standards and government comprehensive financial report.To set up local government credit rating system,include local government debt management performance into government official evaluation systems and create a market-driven debt pricing mechanism all demand the strengthening of government financial information disclosure,supervision and feedback system.Research in future will further study how such informal regulations as government credit assessment and cultural traditions will influence government debt financing behavior and related cost.It will also pay attention to research topics such as local government debt issuance,using,and repayment.