China’s Local Government Debt Risks And Prevention Strategy

Significantly, the organization reform of the finances tax-sharing transform themanagement structure of the governments, which leads to the increasing reliance forlocal government on the economic development, macro-duct, the provision of publicinfrastructure and achieving of public services equalization in1994. Although,theRule No.28in the”Budget Law” of China stipulates that the budget of localgovernment should be formulated by their income and not supposed to be a deficit.Local governments may not issue local government bonds,except for otherwiseprovision in the laws and the State Council. However, due to the impact of variousfactors in the process of economic and social development, local government debt isnot ‘The Secret”, the local governments always have some debt,more or less,apparently or deeply inside, legally or not, and in fact, this debt has become a hugeburden because of the institutional reasons and the impact of external shocks. AuditCommunique shows by the end of2010, local government debt scale add up to10.717491trillion yuan, accounted for the26.5%total GDP, the128.97%nationaltotal fiscal revenue and the143.2%local fiscal revenue during the period. Such alarge-scale local government debt could easily trigger a systemic risk, posing apotential threat to the smooth and rapid development of macro-economic andfinancial stability to run. Accordingly, the definition of a reasonable scale of the localgovernment debt in China, definitude of debt funding sources and application,revealing the potential risks of local government debt, and the countermeasureproposal to resolve the potential risks of China’s local government debt is particularlyimportant.This paper is based on finance, economics and relative discipline. It analyzesthe status quo,reasonable scale and sustainability of local government debt throughlogical methods and single indicator. And it reveals the causes of local governmentdebt and the potential risks. Finally, according to actual situation, we give the reasonable policy recommendations to prevent local government debt. This study isdivided into five parts:The first part is the introduction.This part made a brief description about thebackground and significance of this study and combed the literature review on thistopic at home and abroad, made the content and method and pointed out theinnovation and shortcomings.The second part analyzes China’s local government debt sustainability. Firstly,we define the concept of local government debt and introduce the scale,thecharacteristics,the source of China’s local government debt.It use relevant indicatorsand logical methods to analyze the right-size and sustainability of local governmentdebt.The third part, the analysis of the causes of China’s local government debt. Thispaper discusses the causes of China’s local government debt.There are some popularcauses, such as ‘the central is not equal to local financial authority;macroeconomicpolicies to promote competition in the local government act;the behavior of banksinduce and soft budget constraint and the common pool problem. The typicalmanifestation of government failure is huge scale of local government debt and thepotential risks.The forth part, China’s local government debt risk analysis. Local governmentdebt scale in our country is huge.It has the characteristics such as complexity andconcealment. It is bound to pose a systemic risk to the stable operation of the financeand our country economy development if we cannot treat it proper. This part mainlyfrom the macro level to analyze fiscal and financial risks that the local governmentdebt could trigger, and then provide a prospective analysis for the countermeasures ofthe next chapter.The fifth part, for above parts’ analysis to our country current situation,characteristics, causes, local government debt risk, this part is mainly on puttingforward corresponding strategies and suggestions on how to improve the localgovernment debt management and risk control mechanism, including the following aspects: cultivating resources to develop the local economy, cleaning up the stock ofdebt and controlling new debt, establishing strict management system of localgovernment debt, to establish and perfect the local government debt risk earlywarning mechanism, strengthening the debt management supervision and restraintmechanism, deepening reform of the fiscal system, strengthening local governmentfiscal responsibility.