Study The Development Of China's Local Government Bonds

Sub-national government bonds are issued and repaid by sub-national governments. They are debt certificates that are issued to raise funds considering the developing situation of sub-national economy and the degree of fund shortage, and sub-national government should fulfill the obligation of repaying the principal and paying interest. They are generally used for the construction of sub-national public facilities. Sub-national government bonds first appeared in the United States. After nearly two centuries'development, they has become an important instrument for U.S. states, their sub-national governments, and agent to raise public funds. Raising funds by Sub-national government bonds can enhance the capability of Sub-national governments to provide public goods, provide an instrument for regulating macroeconomic and perfect financial market.China's sub-national government bonds first appeared in the Qing Dynasty. In 1993, the practice was stop by the new China's State Council. In order to cope with international financial crisis, stimulate domestic demand and guarantee the economic growth, the State Council decided that the central government issue 200billion RMB 2009 sub-national government bonds on behalf of sub-national governments. Because of the low interest rate and small scale, the 2009 sub-national government bonds didn't perform well in the market. Despite of their poor performance, sub-national government bonds have outstanding features: low risk, tax exemption and stable return. We should improve the sub-national government bonds system and make full use of it. This paper focus on analyzing the necessity and feasibility of issuing sub-national government bonds in China, studying and using the experience of other countries to improve our sub-national government bonds system.According to The Theory of Public Finance, sub-national governments should provide regional public goods including public facilities, which is the base of regional economic development. The majority of public infrastructure is constructed with a long construction period and huge funds. Raising funds by issuing bonds may solve these problems and avoid intergenerational inequities. Issuing bonds by sub-national governments in China is necessary and feasible. It is significant for our country to establish sound financing channels, improve the sub-national fiscal system and raise public funds. On the other hand, sub-national governments are positive in issuing bonds, investors are willing to invest sub-national government bonds and we have existing bond market.Sub-national government bonds system in the U.S. and Japan are relatively sound, we can make full use of their rich experiences to build our system. We can find that matured legal systems, explicit issuer and sources of repayment, effective management and supervision system are needed in building a sound sub-national government bonds system.From the aspect of improving sub-national government bonds system, it is necessary to study and establish a basic institutional framework. First, central government must enhance administrative control over sub- national government debt. Second, a basic institutional framework including scale control, risk warming, institution for debt supervising and management, credit rating, debt budget and information disclosure is needed. Third, bonds products need to be designed properly. Such as what are the issuers, how to classify bonds, how to decide interest rate, how to repay bonds and how to issue bonds. Establishing such a system is complicated and systematic, some supporting measures are also needed. Such as perfecting laws, enhancing hard budget constraints, improving fiscal system.