The Evaluation And Monitoring Of Local Government Debt Risk

In response to the impact of the global financial crisis, the Chinese government launched a Y4trillion government investment project in November2008, which proposed a huge challenge to the capacity of local government’s supporting funds. Local government raised funds by setting up all kinds of financing platform or other means under the encouragement of the central government, which made local government’s financing channels diversified and local government debt scale expanded rapidly. Thereout, people from all walks of life had a common concern about local government debt risk issues and paid close attention to the following four issues:Firstly, how big is local government debt risk? Secondly, what about local government’s solvency? Thirdly, how to defuse local government debt risk? Fourthly, how to monitor local government debt risk? In response to the above issuses, the paper tried to establish an evaluation system of local government debt risk, which consisted of three levels, to analyze and evaluate local government debt risk.As the basis and beginning of local government debt risk evaluation, the paper compiled a local government balance sheet. Then, we found that local government had sufficient economic resources to repay the debt, but the debt risk was diffusing in the first level analysis. The second lever’s upper part analysis pointed out that the expansion rate of lcal government debt was much higher than that of assets and the degree of the debt risk diffusion was aggravating. The paper also compiled a local government income statement to enter the second level’s lower part analysis. The results showed that local government debt sevice ratio would be high and local government would face a great pressure to repay the debt. Moreover, the debt risk might become uncontrollable. Therefore, the paper analyzed the causes of local goverment debt expansion and proposed several ways to effectively release and defuse local government debt risk. Finally, the paper got into the third level analysis, learned from international experience to establish an early warning system of local government debt risk and carried on an empirical analysis to local government debt risk by using the factor analysis. The results showed that local government debt risk wouldn’t lead to a debt crisis or an economic crisis.