Study On Local Bond Credit Risk Control In China

According to the Budget Law of China issued in 1994, without the specific permission of laws or the State Council, local government are not entitled to issue municipal bond. In the beginning of 2009, in order to address the huge impact brought by global financial crisis on Chinese economy and implement better the government macroeconomic policy, the State Council approved local government issuing 200 billion RMB municipal bonds. Though in terms of concrete operation ways of these municipal bonds, the municipal bond issuing this time to some extent is characterized of its administrative function, it still stands for the breakthrough of Chinese municipal bonds market.To further develop municipal bond market in China, controlling the credit risk of municipal bonds would be the principal task. In the paper first there is the general summary of current municipal bond theory and research at home and abroad, then on the basis of summarizing up the overseas development experience of municipal bond market, there is the brief analysis of municipal bond credit risk. After introducing and commenting on the KMV credit risk measurement and management model, in combination of KMV mechanism principle and research of domestic scholars, the paper applies the model based on KMV model to measuring municipal bond credit risk. By using the model to measure municipal bond credit risk of certain provinces and cities chosen to represent China's different economic level, the paper evaluates the Expected Default Frequency and theoretical safety issuing amount of these areas' municipal bond, so that their municipal bond credit risk is controlled below the safety line. After combining the positive analysis with previous theoretical research analysis, the paper puts forward the policy suggestion of controlling the credit risk in the process of municipal bond market, providing new policy perspective of issuing municipal bond and controlling its credit risk for local government.