Local Government Debt Risks And Preventive Measures

The article studies the history of local government debt in China, takingZhenjiang as an example, analyses the current situation, the main risk, the causes oflocal government debt comprehensively and systematically, and proposes thetechnical route and countermeasure of resolving and releasing the risks of the localgovernment debt.The two basic factors leading accumulated debt for the local governmentinvolve Constructive Government" function and the serious mismatch withdistribution of financial and property rights between the central and localgovernments. For the effective implementation of government policies to stimulatethe economy, after the global financial crisis in2008, the central governmentexecuted Easy Monetary Policy to a large extent, and acquiesced governmentfinancing through the establishment and package of financing platform, whichdirectly led to the enormous increase in local government debt. The local governmentabsorbs a huge amount of money through injection of land, and image package ofbalance sheets. In the view of the debt financing and invest direction of the7majorfinancing platform in Zhenjiang region, the funds are mainly derived from credit andbond issuance, to construction projects of city infrastructure, with a large amount ofmoney lent to the government agencies, such as the finance bureau. By the end ofJune2012, the amount of rigid debt of7financing platform in Zhenjiang has beenreached as large as79billion, and the annual financial cost is expected to reach600million, having formed a heavy debt burden.The main risks, faced by the local government debt and mainly in form of thedebt financing platform, include policy risks, legal risks, liquidity risks and volatilityrisk of asset price. Most of the financial platforms are vanished with land assets, oncethe assets valuation bubble bursts, it will induce serious consequences inevitably.Zhenjiang achieved economic growth and financial enhancement in the procedureswith massive financing of financial platform and the enhancement in construction ofcity infrastructure; however, without significant advantages in industry, especial lackof the core industry with power or strong radiation, its financial base is not very solid.In2012, the business tax increased abnormally in Zhenjiang, by ratio of more than 50%, and the rest main tax income varied with negative growth.Countermeasures against local government debt risk include technical meansand fundamental strategy. The technical means consist of local government debtsecurities, including financing platform, and establishment of provincial or municipalPeople’s Government special sinking funds. Fundamentally, to prevent localgovernment debt risk, effective changes of functions of the government should beenforced, converting constructive government into service-oriented government,improving the current official performance evaluation and promotion system. Inaddition, institutional construction of fiscal transparency should be strengthened, toprovide the legal binding with reasonable liabilities, strict management of funding,effective fulfilling debt-service obligations of local government.