Research On The Legal Risk Of Local Government Financing Platform

Since the global finance crisis has exploded in2008, Local government financing platform (LGFP) develops rapidly with a serious of policies which "maintain growth and expand domestic demand" announced by Chinese government. But lots of problems come out during the development. From the year of2009, the government has warned LGFP about loan risk, asking the banking to control this kind of risk.LGFP is a kind of corporate entity with legal personality, which is founded by local governments at several levels through fiscal allotment and equity or land or other assets injection, is responsible for the financing of public utilities and infrastructure in local governments’jurisdictions, and use some relevant investment means to preserve and increase the value of national assets. Why do so many LGFP come out? One of the reasons is tax sharing system reform in1994. This reform makes the partition of some powers of office between the central government and the local government is not clear. The contradiction of a great deal of the demand of financial expenditure and the lack of the local financial revenue become the biggest problem to the local governments, so that they look for the other extra budgetary ways to finance. The establishment of LGFP remits the contradiction. The second reason is that the blind extension of the functions of our government leads to the integration of government administration with enterprise. In China, the financial burden of the local governments is caused by the expenditure for realizing their functions to a great extent. However, the local governments are responsible for the debts of the enterprises that aggravate the financial burden. When the enough government money is unavailable to provide public services and construct infrastructures, the governments solve the problem of financing only through taking on debt. Currently, the achievement check-up system of our government officials is out of date. The promotion of the officials is connected with GDP growth, which makes the officials overemphasize GDP and take on a large number of debts blindly. That’s the third reason.LGFP has the following characteristics. The first is it has the formation of corporate but imperfect corporate governance. Typically, the local government often appoints the leader who has executive position as the concurrent chairman or the concurrent manager of LFGP. Many leaders are lacking in the experience of business managements and the consciousness of risks and competitiveness. LGFP has the low benefit and the low activity because the management continues to use the way of administrative management. The second is that the loans from LGFP are mainly used to the public welfare projects like highway and Municipal infrastructure. The third is the operating mode of LGFP is particular. LGFP is mainly engaged in public welfare, so the government financial subsidy is an important part of the corporate income. There is a lower proportion of the revenue of main business. The last is the quantities of LGFP increase and the hierarchies down.The reasonable development of LGFP plays an important role in overcoming the impact of the financial risk. Meanwhile, LGFP efficiently integrates a variety of the local resources so as to give full play to the overall resource advantage and improve the efficiency of the allocation of resources. The governments finance a lot of funds in a short time through LGFP to overcome the inadequacy of the local financial resources and improve people’s livelihood. Besides, LGFP efficiently promotes the strategic transform of economic structure. However, LFGP exits many risks.For the commercial bank, it mainly faces up to the following risks:(1) the credit risk of loan. There happened some defaults of LGFP that could not repay the loan and asked the bank for postponing or refinancing.(2) The legal risk. Actually, the public welfare project of LGFP has a long period of project construction and of the recovery of principal. The enough cash is unavailable to repay the principal and interest of loan. In this situation, there is need to empty the government finance to repay the loan that causes the conflict of the limited liability of corporate and unlimited expenditure of finance in law. And there exits the severe legal issue of the loan guarantee of LGFP in practice.(3) The liquidity risk. The liquidity is the lifeline of the bank. If the liquidity is inadequate, it will influence the profit of bank, or even cause the operation of bank can not continue and expand into systematic risk.For the local governments, the nonstandard guarantee ways of the local government for this kind of loans leads to the burden of debts. Finally, the local governments especially the county governments are not able to repay the vast debts. There is no solution but defaults, which make the reputation of the governments damaged.Due to a serious of nonstandard and illegal issues like the imperfect corporate governance, the unreal registered capital, a high rate of non-monetary investment, inability to bear civil liability independently and repayment by emptying the government finance in LGFP, LGFP usually exists problems such as illegal ways of guarantee, inadequate values of the guaranties, and incomplete procedure of guarantee. The loan risk of the commercial bank about LGFP totally depends on the financial resources and credit of the local government. In the matter of fact, the scales of loans have already gone beyond the actual endurance of the local governments in many places. The loan guarantees of LGFP primarily include mortgage, pledge and suretyship. The loan guarantee of LGFP is different from that of the common corporation. The essay will analyze specifically and promote several related suggestions.To keep the loan guarantee of LGFP away from illegal risks, first of all, there is need to standardize the ways of mortgage and assure the reality of mortgage. Secondly, the way of pledge is to be selected cautiously and the management is to be strengthened to lower the risks. For the pledge of the usufruct of the government subsidy and the pledge of the revenue of selling the land bank in the future, the biggest problem lies in uncertainty, and the bank should be cautious of these kinds of pledge. Thirdly, the laws are to be carried on strictly to avoid the situation of the ineffectiveness of suretyship. Compared to the local government, the bank is a weak position. The bank should attach high importance to the risk of ineffectiveness of guarantee which the government provides to assure the own benefit and prevent the risk of loan. Fourthly, the management mechanism of LGFP is to be perfected. The governments at all levels need build and perfect the system of financing management for reducing the loan risk and the financial risk and scientifically use the loan fund. At last, the debt mechanism is to be standardized. From the perspective of the perfection of tax sharing system reform and the local economic growth, thinking of the demand of various regional economic developments and the ability of financial revenue, I suggest to amend the rule of prohibiting the local governments from issuing bonds in public in the budget law, gradually and conditionally allow the local governments to issue bonds with the central government strictly supervising and examining and approving so as to control the risks and develop the local economics.In a word, because of the specific characteristics of the loan of LFGP, it involves complicated legal rules including rules of government budget, state-owned assets management, land, house property, banking supervision, etc. besides several fundamental laws like Property Law, Guaranty Law. On one hand, commercial banks ought to clean up the nonstandard guarantees to avoid the fail of their security interests. On the other hand, the complexity and particularity of the guaranty formation of LGFP need to be fully emphasized. For the particular way of guarantee, a focus on the legitimacy, the efficiency, and the realizability of the guarantee and the implement of guarantee measures is necessary. Especially for the loan with an inadequate cash flow, a concern on the situation of the business operation is also essential.