The Research Of Local Government Debt Risk

Domestic and foreign research reports said that the debt of Chinese local government, which causes the risk of financial crisis, is going out of control to increase while the impact of last global financial crisis is still prevalent. However, some scholars believe that Chinese local government debt risk is still in the controllable range. This paper argues that those two views are not paradoxical, but some areas and projects would also increase debt risk although the government debt under supervision is actually manageable. In addition, the paper defines the local government debt as the debt of local government including contractual obligations as well as the expenditures, financing platforms and possible or necessary expenses in the future in a broad and social perspective. These debts are not all within the scope of the regulation and thus government debt risks are not absolutely in control. This is why we emphasize it is the debt which is under supervision can be controlled.This paper aims to analyze the risks of local government debt through the study of the size and types of local government debt and what has the fund used for. Finally, we try to find where the risks stem from and provide some suggestions on how to prevent and control local government debt risks.According to the theory of public goods and fiscal decentralization, local government debt is an important way of financing to provide public goods and services to compensate for market failure. The principal-agent theory says that there exists a game between the central government and the local government which acts as an agent of the central government. In this game, the local government has asymmetric advantage of information relative to the central government in terms of the provision of public goods and other budgetary expenditures, leading to the difficulty of the central government to distinguish the budget requests of local government effectively. What’s more, the local government has strong demand to perform well since the political system and evaluation mechanism are not consummate and finally this leads to a great expansion of local government debt in scale. The study shows that the large scale of local government debt has exceeded the solvency of local government and even caused a partial emergence of the debt crisis. At the same time, the local government provides guarantees for local financing platform and state-owned enterprises which resulted in the increasing of debt. Existing budget law stipulates that the local government can’t issue bond independently and causes kinds of contingent liabilities, and the debts become more implicit. Meanwhile, local government can’t exactly count the scale of the debt. If these shortcomings can’t be promptly corrected, it would probably be the incentive of local government debt crisis in the future.Even though the local government debt does has a positive effects on economy expansion, adjusting income distribution, providing cheap public goods and services, the scale, structure, efficiency and external risk of the local government debt can’t-be ignored. This paper argues that the local government debt risk mainly stems from the unequal property rights and liabilities between central and local government. In addition, the lack of government investment and financing system and the lag of political reform are both important reasons. The tax system reform is not thorough and the property rights can’t match the liabilities, the transfer payments are inadequate in the provincial grade, all of these lead to the local government’s lack of fund. The lag of political reform causes the blind expansion of the debt. And lacking of reasonable and effective government investment and financing system have resulted in the use of various means to obtain funds, increasing risk of further accumulation. To resolve local government debt risk, we must strengthen local government debt management, unify the standard of counting local debts and so on. We should start from the system to resolve the debt risk, continue to promote the reform of tax system and financial system, improve the transfer payment system, deepen financial system reform and develop our own local government bond, and finally make the scale and structure of local government debt be controllable in order to guard against local government debt risk effectively.