Solvency Analysis Of Local Government Bonds In Our Country

Since the founding of the People’s Republic of China, our country has taken quite cautious attitude to the local government debts."Budget Law" promulgated in March1994clearly banned of the issuance of local treasury bonds. But with the acceleration of economic development in recent years, local government has accumulated a lot of debt. The hidden nature and non-standard of the local debt will increase the difficulty of local financial management, accumulating financial risks and preventing the healthy economic development. In addition to reduce the government’s financial risk, issuing local treasury bonds also can standardize the government’s financing channel. In response to the financial crisis, the Treasury Department issued200billion yuan local treasury bonds on behalf of local government in2009for local infrastructure and public welfare construction. In2010and2011, the Central Government continues to proxy local governments to issue200billion yaun local treasury bonds. The efficient use of local treasury bonds and the timely repayment will have a positive impact on China’s economic development.Based on the practice of the2009local treasury bonds, this article hope to measure the solvency of local treasury bonds of30provinces and cities in2009by studying the reasonable issuance and payment regulations of the local government bond. Though principal component analysis four principal components have been extracted, that is, regional economic and financial foundation, continued solvency, immediate solvency and solvency growth pressure. Furthermore, the principal component scores function model is designed by regression analysis, and finally get principal component factor scores and comprehensive solvency situation of thirty provinces in China. Some policy recommendations are suggested for the sustained release and continuous health settlement of Chinese local treasury bonds.In this paper, the solvency of the local government debt has been elaborated from five parts.The first part is the introduction of this article, Introducing the background, the research purpose and significance, the research methods, combing and summarizing related literature and with a summary of innovation and insufficient of this paper in conclude.The release of local treasury bonds in2009has opened up a new path for local governments to revitalize the local economy, is not only conducive to improving the financing system of local government and local financial system, but also conducive to clear the credit of local government and constrain the local government budget. the local government debt repayment capability research, has important significance to correctly define the responsibilities of central and local government, and to improve the public finance system, enrich the debt theoretical system, and to deepen the debt finance theory.there is a relatively complete theoretical development on municipal bonds in western developed countries, the scholars mainly study on the issuing, effectiveness, supervision and risk of municipal bonds, but for the developing country debt analysis is not enough. Domestic scholars pay more attention to the necessity, feasibility and issuance effect and system design, risk and its prevention and other aspects of local treasury bonds in China, but few researches on the subsequent payment of debt.The second part is the status of the Chinese local treasury bonds, introducing the boundaries, types, characteristics and the theoretical basis of local treasury bonds. Based on large amounts of data, the development history and current situation of local treasury bonds is also be introduced. Finally, the existing problems of it have been analyzed.Local treasury bonds is a government bonds issued by local government or their authorized agencies, funds being raised for municipal infrastructure and large public construction projects, can be divided into general obligation bonds and revenue bonds, also, some bonds have mixed characteristics of general obligation bonds and revenue bonds. It has so many characteristics as credit, need to repaid, public, long-term, special nature of the issuing subject, preferential interest income and so on. The theoretical bases are public product theory, the theory of fiscal decentralization and government debt theory. The history of China’s local governments can be traced back to the Xuantong years in Qing Dynasty, when "local bonds ticket" issued by Shanghai. Since then, many local governments have issued some bonds. But the" budget law" promulgated in1994stopped the local government bonds. So, a lots of local government start to raise economic construction funds through the disguised form of bond issuing by investment and financing platform companies by disguised debt. In order to tackle the economic crisis, the Central began in2009proxy issued200billion local government bonds, However, this issuing has the following problem:the issue size is small, the coupon rate is low, the volume is small, the secondary market is not active, so the local government bond market needs to be improved. And unclear powers and responsibilities between central and local government, would easily lead to over-investment in local government, causing the solvency risk, May also pulling large area difference, exacerbating regional unbalanced development.The third part analyzes the status of repayment of local treasury bonds and the Influential factors on these bonds. Seeing from strength of our local governments, the disposable financial gap between governments at all levels is rather large, the financial strength of eastern developed area is more abundant, debt bearing capacity is higher, and some relatively backward economic base of local government lack of economic strength to support debts repayment. Therefore the factors that affect repayment, not only being with economic and financial strength of the local government, but also with the amount and structure of investment in fixed assets, also with the size and structure of the bond itself, and subject to the use effect of the funds from issuance of bonds.The fourth part is empirical study of the repayment capacity of local treasury bonds. This part first introduces the empirical methods of principal component analysis and the analysis of ideas, the relevant principles and analysis steps and framework. Under the premise of little loss of information, principal component analysis extracts from various indicators into a few synthetic indices using the idea of dimension reduction, is a multivariate statistical analysis method, can be a better analysis and evaluation of government bonds solvency.This article selected thirteen indicators, that is, liability ratio, debt ratio, the national debt rate, debt dependence, solvency ratio, debt income and expenditure ratio, deficit ratio, financial leverage ratio, the proportion of budgetary funds investment, the growth rate of urban fixed asset investment, and the growth rate of fiscal revenue, fiscal expenditure growth rate and GDP growth rate, from five aspects of economic strength, financial strength, investment in fixed assets, the bond scale, the use efficiency of funds, to measure the local government bongs solvency of the30provinces and cities in2009. By principal component analysis4principal components are extracted, these are regional economic and financial basis, the continued solvency, current solvency, and the payment pressure. By means of regression analysis method to design the main component score model, and finally get the principal component scores of30provinces and the comprehensive solvency scores ranking.The fifth part is the conclusion of the solvency of local treasury bonds and enhancement measures to the solvency of local treasury bonds. From a solvency point of view of the2009provincial and municipal local government bonds, Tianjin, Jiangsu, Beijing, Shandong and Shanghai are relatively outstanding region in comprehensive strength of the solvency of local treasury bonds. The good areas include7provinces and cities as Guangdong, Zhejiang, Fujian, Inner Mongolia, Liaoning, Hebei and Shanxi. The general area of the comprehensive strength include8provinces and cities as Anhui, Hubei, Jilin, Hunan, Henan, Chongqing, Guangxi, Jiangxi. The weak areas of the comprehensive strength include10provinces and cities as Hainan, Sichuan, Guizhou, Heilongjiang, Ningxia, Yunnan, Qinghai, Shanxi, Gansu and Xinjiang.Based on the above analysis, some proposals to improve the comprehensive solvency of local treasury bonds are made from aspects such as local economic and financial strength, long-term sustainability of solvency, the current solvency as well as reimbursement of pressure. First of all we should vigorously develop the regional economy, rational planning of local investment in fixed assets, increasing the per capita income of residents, regulation the financial expenditure and the establishment of public finance expenditure framework. Secondly, we must increase local government revenue, and further improve the system of transfer payments. Thirdly, it needs to control the local government bond issuance, so as to reduce the repayment pressure of local government bonds from the source. For different bonds purposes, clear the main body and solvency source of bonds to guarantee their spot solvency. Finally, it should be limited to the area of government investment, in order to protect the reasonable application of the local government debt funds, and reasonable growth in local government debt. This article further enhances the solvency of local treasury bonds from the sinking fund mechanism and insurance mechanisms, as well as an institutional guarantee.