Research On China’s Local Government Bond Issuance System

China’s local governments are faced with the problems of “land finance”, excessivecompetition in attracting investment and capital as well as a large number of hiddenliabilities.The reasons are as follows: firstly, intergovernmental fiscal relations areimbalance.Secondly, without finance autonomy, local governments can’t increaserevenue according to expenditures, which leads to their preferences for extra-budgetarysources. The tax system reform, started in1994, causes the centralization in revenue andthe decentralization in expenditures, which results in fiscal imbalance and localfinancial difficulties. In fiscal difficulties, local governments seek extra-budgetaryrevenue that creates expansion of the debt size because of weak regulatory.Bondfinancing system, based on fiscal autonomy, is beneficial to the normal expansion of thescale of government revenue and expenditures, maintaining a balanced budget,strengthening the supervision and regulatory of governmental financing behavior.Butthe sustainable development of local government bonds financing needs the followingconditions: firstly, optimizing intergovernmental fiscal relations to keep revenue andexpenditures balance.Secondly, improving the effectiveness of local governance anddeveloping local democracy to strengthen the supervision of the government financingbehavior.Thirdly, broadening the financial resources of the local government andimproving the level of credit.This paper attempts to study the system of localgovernment bond issuance in the context of the reform of tax system andintergovernmental fiscal relations.Furthermore, this paper try to build China’s localbond issuance system in a progressive mode according to the current situation, andmake recommendations for the long-term development of the bond issuance.The paper is divided into seven parts.The first part is an introduction on thebackground, significance, research methods and possible innovations of the topic.Thesecond part sets forth the general theory.First of all, the meanings of “local governmentbond”and “local government bond issuance system” are defined.Besides, the theories ofgovernment debt, public goods and fiscal decentralization are summarized to providetheoretical supports for local government bond issuance.The third part analyses thelocal government bond experiences in the United States and Japan, then sums up theenlightenment to China.Part IV examines the present situations of China’s local bondissuance, and find out the problems and reasons.The fifth part testifies local government bond is necessary for deepening the reform of the fiscal relationships, providing localwith revenue source, promoting standardized financing and the intergenerationalfairness in capital expenditures, promoting local governance democratization.The sixthpart tries to build China’s local government bond issuance system with conditions,principles and framework.Part VII concludes the summary of the article, and pointedout some difficulties that need further study.