A Comparative Study Of Sino - US Local Debt System

According to the National Audit Office, the national government debt audit onDecember30,2013showing that by the end of June,2013, the total sum of the localdebt had reached17.89trillion RMB yuan. The local debt issue has become aninevitable one for the economic development of China, which is excessive in quantityand rapid in growth. As Cheng Siwei, vice chairman of the NPC StandingCommittee，put in a speech that, the U.S. subprime mortgage crisis resulted in lendingmoney to a debtor who did not meet the criteria, while the potential subprime crisis ofChina may resulting in lending money to a local government of that kind.Since the tax reform in1994, local government’s financial power has shiftedwith the burden increasing with economic development. Some local governments areeven in arrears with the wages and project funds. From historical experience, the taxdistribution system is a new thing for the Chinese government, which lacks theexperience and the institutional arrangements in transfer payments between the centralgovernment and local government, which therefore, leads to a financing mismatch. ASpecific case to the local level government is their lack of funds in livelihood areaswith the luxury office buildings built at the same time. Therefore, in order to solve theproblems of financial weakness, lack of transfer payments and the mismatch ofresources, the only way the local governments can do is to borrow money. Howeversome internal problems of the local governments erupts such as the absence of a clearsubject, a large amount of debt with fast growth, heavy reliance on land markets anddeficient supporting laws and regulations and other issues in the process.U.S. municipal bonds have been issued with the history of a hundred years.Andthey all have perfect laws, regulations and supervisory experience be it the Federalgovernment or the local government. The top five states in terms of GDP in the USare California, Texas, Florida, Illinois and New York, and in2013the top five states interms of the quantity of the issue of municipal bonds were California ($1.991billion), New York ($1,722,700,000), Texas ($1,347,200,000), Illinois ($447.5 million) and Pennsylvania ($438.5million), which coincides with the basic amountand level of economic development and GDP. Thus as the economy develops,municipal bond issue volume will continue growing. Therefore, it may give us someexperiences and lessons through analyzing the system of local bonds in the US andcomparing the two countries in issuing local bonds.With China’s economy continuing to develop, issuing local bonds to raise fundshas become an inevitable way for Chinese local governments so as to provide betterpublic services, infrastructure and promote economic development. Therefore, thispaper emphasizes that the pace of allowing local governments to issue local bondsautonomously should be stepped up, which is an important way to reduce the opaqueof various kinds of "quasi-local bonds "and unregulated operations. It will help tocontrol the local debt crisis and avoid local debt kidnapping the entire economy forour country to lead the local governments financing in an open, clear and low-costway rather than the black box operation by the shadow banks.The fundamental purposes of the autonomy of issuing local bonds by localgovernments lie in rationalizing the fiscal and taxation relationship between centralgovernment and local governments through laws, institutionalizing a healthy andorderly fiscal and taxation relationship, broking the paternalistic way of regulationand making local governments independent economic men to considerateindependently the local development and to undertake independently local economicobligations. Thus, this will not only activate the vigor and enthusiasm of the localeconomy, but also to avoid the phenomenon of “a place on the chaos, one will die "over the past three decades of reform and opening up.Qian Mu thought in his book “Chinese ancient political gains and losses" thatthe government system of Han dynasties is more excellent than the others because ofthe good exchange mechanism between central and local. That local governmentsissue bonds can rationalize the central and local government relations and pave theway for further political reform.Specific methods to that fundamental purpose could be carried out throughmodifying the " SecuritiesAct "," Audit Law "," Budget Law "," Commercial Bank Law", as well as adding more clause to “Intergovernmental Fiscal and TaxationDistribution Law” and “Local Debt Law”.