The Necessity Of Issuing Municipal Bonds

China is currently in the construction of urbanization, industrialization accelerating stage, and the a large-scale infrastructure have to be finished in a short time. It makes construction task very difficult. Such huge investments have been far beyond the local government’s financial capacity, which made the gap between infrastructure construction funds and investment budget greater. In order to fill with this financing gap, a new government financing mode is necessary. In most of the western countries, the way to solve money supply shortage problem is through issuing municipal bonds. During the transformation period in China, can issuing municipal bonds be the way to provide effective financing guarantee? This is the core problem of the paper.The classical theory on government debts including the theory of public goods supply, the theory of fiscal decentralization, as well as the theory of fiscal federalism. Among all of this, the frame which fiscal federalism theory outlines is the most similar with Chinese government organization structure. However, this theory is still lack of the explanatory power of China’s reality. The basic reason is that the public can’t participate in government economic decision through the way "voting with their feet". The main form of Chinese government debt is implicit liabilities, which formation is associated with the preferences of china’s central governments and local governments, as well as the constantly adjust games between them.The most important innovation of this paper lies in put forward a new frame which based on the endogenous decentralized and inter-governmental competition. On the one hand, different from the previous literature, this paper holds the view that the fiscal decentralization between central and local government is endogenous, that is, the initial decentralization can promote economic development, but with the economic growth, the local government will get more and more benefits from decentralization, thus demand more property of it. Which is contrast with the central government. On the other hand, after the tax system reform, the economic target of local governments gradually turn to retaining profit maximization, which intensified the capital competition between government.The right of property between central and local governments changing and the impact of competition between governments created "the strong preference for infrastructure construction investment" accompanied by "the constant expand government financial power", which stimulated local governments keeping away from administrative control. They began to use local financing platform and some other similar means for infrastructure construction financing. Recessive debts’risk lies in its concealment, and harmful for public supervision.Municipal bond markets can not only provide plenty of start-up capital, but also help to model the harmony relationship between central governments and local governments. What’s more, allowing local governments issue bonds can introduce market mechanism in government decision-making process. It can restrain government financing through supervisery mechanism of bond market. Once governments didn’t obey rules, it will be punished by markets. Under the restriction of markets, local governments will carefully arrange their investments and financing behavior, as well as constraint costs, reducing waste, and improving capital operation efficiency.The structure of this paper is as follows. The introduction part introduces the importance of the problem, and makes critical thinking about the existing government debt theory. The first chapter reviews in detail about the theoretical basis of government debt, and points out the limitaion in Chinese market; In view of the implicit debt is the main push factor in China’s local government debts, so in the second chapter, this article descript the amount and the structure of implicit debts, put forward the concealment of the recessive debt is the direct reasons of local government excessive investment, but that is not enough to support opening municipal bond market.The third chapter is this article core chapter, through fiscal decentralization and competition between governments, we analyze the root reason of excessive government liabilities; In the fourth chapter, this paper use system-GMM method to test the assumption in the third chapter, and found that fiscal decentralization and competition between government present a significant positive correlation with excessive government liabilities. Obviously, the formation of local governments’ excessive debts have profound reasons behind the system, which is difficult to be changed in a short time. Municipal bonds provides important guarantee to recessive debts dominance. The fifth chapter discussed the necessity of opening bond market from three aspects, that is provides a sufficient funds for urbanization, straightens out the relationship between central and local governments, and constraints local government behavior. The sixth chapter is the summary of the full text, which put forward some policy suggestions of opening municipal bond market.