Study On The Debt Risk Of Local Government In China

In recent years,a prominent problem that the Chinese economy faces is the increasing risk of local government debt.In 2008,coping with the negative impact of the international financial crisis on the macro economy,the Chinese government implemented a large-scale economic stimulus plan.The expansionary economic policy has effectively stabilized China's economic growth in the short term,but it still led to a significant increase in the debt ratio of government departments(especially local governments).Although official statistics show that the local government debt ratio is still below the international warning line of 60%,local governments have a large number of implicit debts and contingent debt.According to the Ministry of Finance,the size of local government debt at the end of 2017 was 16.51 trillion yuan.The International Monetary Fund has estimated that the amount of implicit debt of local governments in China at the end of 2017 was 27.8 trillion yuan.The full aperture of local government debt at the end of 2017 was 44.31 trillion yuan totally.The debt scale has increased by 221.03 times from 0.1829 trillion yuan in 1996 over the past 21 years,and the average annual growth rate is much higher than the GDP and local fiscal revenue during the same period.Implicit and contingent liabilities do not only have huge size,but also lacks standardized operations and transparent regulation.Now implicit debt has become a major part of local government debt risk.When the economic situation is improving,local governments are not prone to debt defaults;once the economic situation weakens,debt risks will increase as the government's debt repayment pressure aggravates.In 2017,China's the top annual economic meeting listed "Preventing Major Risks" as the top of the three primary missions in the future,and clearly stated that the focus of the risks is financial risks.In 2018,China's the top annual economic meeting proposed to "prevent abnormal fluctuations in financial markets and properly handle local government debt risks" in the future.The key to preventing and mitigating the local government debt risk lies in objectively and effectively evaluating the government debt risk,and fundamentally grasping and understanding the mechanism of debt risk formation.To this end,the main work carried out in this article is:First,build a research framework for local government debt risk.As a kind of public debt,local government debt is the financial obligation of the government departments and their affiliated institutions under the central government to borrow or issue bonds to individuals and social organizations.Debt risk arises from the uncertainty between the return of debt funds and the sustained repayment that the borrower is forced to accept.Therefore,liabilities are only part of the debt risk problem.A comprehensive analysis of the local government debt risk in China,in addition to local government liabilities,also needs to pay attention to local government assets.Based on this,this paper defines the connotation of local government debt risk from the perspective of debt characteristics.Through the theory of public goods and intergenerational equity,the power of intergovernmental relations,regional economic competition,contingent claim approach and portfolio risk analysis,this dissertation explore some of the basic content involved in the research of local government debt risk,and provide theoretical basis for further analysis.Secondly,basing the evolution process of local government debt system in China,this paper examines the current situation of local government debt in detail,and finds the main problems existing at present.1)the expansion rate of debt scale is higher than the economic growth rate for a long time.If this trend continues,it may lead to imbalance of local finance in the future.2)Although the debt burden rate of local governments in China is still far from that of Western countries,if measured by the debt ratio,the debt burden of local governments in China is higher than that of Britain,France,Germany,Canada and close to the level of the United States.The ratio of local government debt balance per capita to disposable income per capita is roughly the same as that in Western countries,which shows that the debt burden of local government in China is relatively serious,and the debt bearing capacity of government and private sector is relatively weak.3)China has promoted large-scale investment in infrastructure construction,resulting in excessive supply,resulting in a decline in the return on government debt funds year after year,and there is a danger that incomes will not be able to meet the expenses in the future.4)The distribution of local government debt maturity is unreasonable,short-term debt is too much,medium and long-term debt is too little.Due to the large scale of investment and the long construction period,debt funds are mainly invested in infrastructure.There is a serious mismatch between the return of local government assets and the payment of interest,which needs to be maintained by debt rollover.This kind of financing will not only aggravate the debt burden of the government,but also further reduce the debt maturity structure to the short term.Third,through the preparation of local government balance sheets,we comprehend the financial standing of of local governments in China.According to the data provided by the local government's balance sheet,we use contingent claim approach and portfolio risk analysis method to quantitatively measure and evaluate the local government debt risk.The results show that the local government risk increase in 2010-2017.The direct factors that lead to the increase of local government debt risk are the local government's leverage ratio is rising and the continuous decline in the average annual rate of return on local government's repayable assets.If the pension gap is included,the local government debt risk will increase further.As far as 2017 is concerned,only the current value of the pension gap actually incurred by the local government is less than 24 trillion yuan,and the local government debt risk can be out of peril zone.Fourth,by focusing on the structural problems of government governance,we find the formation mechanism of local government debt risk by micro-economic analysis.The relationship between local govenments and investors in China is like the landowner and tenant.In the competition for attracting foreign investment between regions in China,local governments provide the land use rights to investors,and give them with various public goods and public services which is necessary for the production.Due to the promotion incentives,local officials tend to promote public investment projects such as infrastructure to send their performance signals to their superiors.In the promotion game between officials from different regions,attracting investment local government,transfering land use right,urbanization and construction of development zone,land finance are coupled together and support each other,forming a trend of continuous self-reinforcement.Over investment of infrastructure and local government debt expansion lead the local government debt risk increasing.The empirical test results by the provincial panel data in China show that the demand of local government debt financing remain strongly increasing in the context of over investment of infrastructure.Finally,this paper combines the current situation of local government debt risk,the result of evaluation of local government debt risk,and analysis of the mechanism of local government debt risk,provides a series of policies and suggestions to prevent and control local government debt risk in China,On the basis of drawing lessons from international experience.1)Improving the assessment mechanism of local officials,incorporating local government debt into performance evaluation,in order to strengthen local government self-repayment incentives.2)Introduce accrual basis and establish our government debt accounting system based on this accounting basis,so as to improve the disclosure of local government debt information.3)To set a risk warning system which is adapted to the situation of our country is key to monitor the debt risk level of local governments in general.4)A special emergency disposal mechanism should be set up to prevent debt risk from runaway.5)Optimize and improve the current local government bond issuance management system.6)Promote the development of local government credit rating market and promote the healthy and orderly development of credit rating industry.