Research On The Growth Mechanism And Causes Of Chinese Subnational Government Debt

Since the global financial crisis in 2008,the scale of subnational government debt in China has expanded rapidly.How to effectively manage subnational government debt has become the focus of academic circles at home and abroad.In order to curb the excessive growth of subnational government debt,the Chinese government has issued a series of normative laws and regulations since 2014,trying to establish a new subnational government debt financing mechanism through debt transparency and hard budget constraints.With the implementation of relevant policies,the explicit debt scale of subnational governments has been reasonably controlled,but the hidden debt,which is a kind of more hidden subnational government debt,continues to grow rapidly,may causing new financial risks and risks of public finance.In the past,behind the rapid growth of subnational government debt is actually the spontaneous over-borrowing behavior of subnational government under the influence of various external conditions.Therefore,under the background of China’s own systems,this paper studies the debt growth of subnational governments in China,analyzes the strategic debt raising behavior of subnational governments behind it,and explores the management policies that can encourage subnational governments to rationally borrow.The content of this paper is not only conducive to the moderate growth of subnational government debt in the long term,but also conducive to the control of the subnational government debt’s overall risk.And finally it is helpful for building a long-term mechanism of subnational government debt governance.Based on the change of Chinese subnational government debt’s scale,under the two institutional backgrounds of political tournaments and soft budget constraints,this paper deeply analyzes the mechanism of subnational government debt growth caused by intergovernmental game.And based on the analysis of the mechanism,this paper then analyzes impacts on the borrowing behavior of subnational governments by combing with recent changes in the background of borrowing and the factors of political economy such as official characteristics and regional characteristics,in order to give a reasonable explanation for the growth of Chinese subnational government debt behavior from the perspective of strategic borrowing.According to results of the analysis,the paper puts forward the corresponding policy recommendations.Firstly,this paper summarizes the existing research related to the growth of subnational government debt,and sorts out the three institutional backgrounds faced by Chinese subnational governments which are the personnel system relating to cardres,the fiscal decentralization system and the debt financing system,so as to lay a theoretical and realistic foundation for the further analysis of the mechanism of subnational government debt growth.Secondly,based on the two institutional backgrounds of political tournaments and soft budget constraints,this paper analyzes the growth of subnational government debt from three aspects and puts forward relevant theoretical hypotheses.First of all,by constructing the game model of subnational governments and the game model of central and subnational governments,this paper studies how subnational governments play the game on political promotion and rescue resources under the two backgrounds of political tournaments and soft budget constraints,and then how subnational governments make strategic borrowing behavior.On this basis,this paper continues to deepen the theoretical analysis of subnational government debt growth,combining with factors of the political economy,and studies the influence of official characteristics and regional characteristics on the borrowing behavior of subnational governments.What’s more,based on the debt-raising background’s two important changes which are the issuing of debt-dissolving tasks and the implementation of subnational governments debt accountability mechanism,this paper deduces subnational governments’ behavior of rasing excessive debt from the theoretical aspect,so as to improve the explanatory power of the research to the current situation of subnational government debt growth.Thirdly,on the basis of theoretical analysis,this paper uses the method of statistical analysis and empirical analysis to verify the theoretical hypotheses and viewpoints of the subnational government debt growth.First of all,this paper makes a descriptive statistical analysis of the current situation of subnational government debt in China from the perspective of the stock and the increment respectively,so as to preliminarily verify whether the theoretical views relevant to subnational government debt growth are tenable.What’s more,based on the panel data of 30 provinces(municipalities,autonomous regions)from 2006 to 2015 and a series of pre-tests,this paper uses two basic spatial econometric regression models,the expansion model of official characteristics and the expansion model of regional characteristics to empirically test theoretical hypotheses related to subnational government debt growth from a more rigorous perspective,and also tests the robustness of regression results.Based on the theoretical analysis and the empirical analysis,this paper draws the following conclusions:(1)In China,there is a positive interaction between subnational governments’ borrowing behaviors under the political tournaments.That is,the more a region borrows,the more other regions with similar level of economic development will borrow.However,the positive interaction between borrowing behaviors is different in different regions.The western regions and the backward regions in the performance competition response more intensely to the borrowing behavior of regions with similar economic level.(2)Two kinds of official characteristics that are provincial governors’ working experience and tenure will affect the subnational governments’ borrowing behavior.If provincial governors have work experience in corporates,the growth of subnational government debt in their jurisdictions is relatively more;If provincial governors have experience in central government,the growth of subnational government debt in their jurisdictions is relatively less;If provincial governors only have local political experience,the growth of subnational government debt in their jurisdictions is relatively less;Provincial governors’ tenure will have an inverted ushaped impact on the growth of subnational government debt in their jurisdictions.In the early stage when provincial governors take office,subnational government debt will grow faster,but the growth rate will gradually decrease as provincial governors’ tenure gets longer.(3)In China,there are two kinds of interaction between subnational governments’ borrowing behaviors under soft budget constraints: The first one is the positive interaction between borrowing behaviors of regions with poor financial resources.That is,when the subnational governments in regions with poor financial resources borrow more,the subnational governments in other regions with poor financial resources will also borrow more.The second one is the negative interaction between borrowing behaviors of regions with strong financial resources and regions with poor financial resources.That is,the borrowing behavior of regions with strong financial resources will become more conservative as the region with poor financial resources borrows more.(4)The regional characteristics will have impacts on subnational governments’ borrowing behavior.Bearing more important public service expenditure will strengthen the subnational government’s preference of borrowing,but at the same time,it will weaken the positive interaction between borrowing behavior of regions under the background of soft budget constraints.(5)The issuing of the task of dissolving subnational government debt and the implementation of the accountability mechanism of subnational government debt have temporarily controlled excessive borrowings by the subnational government.The content of this paper has important policy implication for controlling the rapid expansion of subnational government debt scale and preventing the risk of subnational government debt.Based on the results of the research,combined with the actual situation of subnational government debt in China,this paper puts forward relevant policy suggestions on improving subnational government debt governance:(1)formulate plans to solve the hidden debt in line with local conditions,dissolve the stock of subnational governments’ hidden debt effectively and prudently;(2)improve the system of performance evaluation index from multiple perspectives and improve the evaluation system of the promotion of local officials;(3)select and train local officials reasonably based on their working experience to achieve a moderate increase in subnational government debt;(4)promote the reform of inter-governmental division of fiscal powers successively,and help harden budgetary constraints of subnational governments;(5)improve the reward and punishment mechanisms related to subnational government borrowing to guide the subnational government to borrow money rationally;(6)strengthen the performance management of projects corresponding to subnational government debt and improve the effectiveness of using funds from debt.