Quantitative Analysis Of Debt Sustainability In China

As the U.S. subprime mortgage crisis bursted, people paid more attention to many economies’ debt situation in the world. In2011, Japan’s debt rate was up to more than200%and the United States also faced the challenges of the debt ceiling, then the national debt had become the main difficulties of the post-crisis affecting the world economic recovery and had attracted wide attention. In the context of the international financial crisis and the European debt crisis, it is necessary to analysis the debt sustainability, control the scale of sovereign debt reasonably and prevent the debt risk. Study on the debt problems has laid a theoretical foundation in response to the crisis, and also enrich and improve the intervention of Keynes National the ideological. It has important theoretical significance.Debt sustainability mainly focuses on whether the government has the ability to repay the debt. If a government does not have the ability to repay the debt, the country’s debt is unsustainable, and even lead to a debt crisis. Domestic existing literatures on debt sustainability focus on the cointegration test of financial income and expenses, concern about the long-term stability of the financial situation, and also some literatures introduce a non-linear method. On the basis of the existing literatures at home and abroad, the debt burden rate is directly introduced into the model for quantitative analysis of debt sustainability, in order to provide a reference for government departments to develop policies.This paper includes the following aspects:1. Theory analysis of the debt sustainabilityOn the basis of the non-Ponzi game condition, debt bounded theories and the government budget constraint theory, this paper discusses the debt sustainability conditions.2. A descriptive analysis of the debt related risk indicatorsThis article analyses the important indicators of the debt risk, such as the deficit rate, debt burden rate and the dependence on debt. Through the analysis, we find that the rate of our deficit and debt burden ratios are in the safe range and the dependence on debt is slightly higher than the international warning line. Our country’s debt risk is low and the outbreak of the sovereign debt crisis is very unlikely.3. Estimate of the fiscal reaction functionThis paper estimates our country’s fiscal reaction function and analyse the debt sustainability based on the theory of the government budget constraint, and consider the temporary impact of fiscal revenue and expenditure.It shows that the feedback coefficient in the fiscal reaction function is positive, and slightly higher than the estimated value of the other countries in the existing literature. Our primary surplus ratio increases with the increase of the debt burden ratio. The central government has given full consideration to the debt burden and make the appropriate adjustments. There is a strong ability of the fiscal adjustment, and the positive feedback coefficient does not undermine the sustainability of our debt.4. Prospective study to examine the sustainability of our debt.On the one hand, this article is based on the stability assumptions of past trends in the uncertainty of the future. The randomness of the key variables of debt dynami cs is brought in this paper. We use the Monte Carlo method to predict the level of debt in the future and build the sustainability risk indicators. We predict that the debt burden rate of our country in2012will decrease. The probability of the ratio which is more than0.15is15.21%. Three years from2011, China’s sustainability indicators are greater than the critical value of0.4. The size of the debt in China is in the safe range, but there is greater upside risk of the debt burden rate from the fourth year.On the other hand, we designed several crisis scenarios and analyze changes of the debt burden rate in various crisis scenarios:with the impact of the actual rate of economic growth, the change of the debt burden rate is not very big, but with the impact of the actual primary surplus ratio and contingent liabilities, the debt burden rate has exceeded30%, reaching35.64%, It indicates that the change of the actual primary surplus ratio and contingent liabilities has much greater impact on the debt burden rate.Innovations of this paper are two-fold:Firstly, the paper constructs a fiscal reaction function, and the debt burden rate as a variable is directly introduced in the model. At the same time, we take into account of the impact of temporary fluctuations in financial revenue and expenditure. It provides a kind of method to analyze China’s debt sustainability directly. Secondly, this paper introduces the forward-looking research method and uncertainty through stochastic simulation and stress testing to make up the lack of static debt analysis and provide a new perspective for the study of China’s debt risk.