The Research On The Risk In Local Government Debts

In2008, the financial crisis sweeping quickly of the worldwide, this was caused bythe subprime mortgage crisis of American. As response, proactive fiscal policy waschosen that a4trillion project was presented by the Chinese government as the economicstimulus plan. However, the central government can provide an investment that onlycover30%of4trillion, the rest of70%(nearly2.82trillion) need to provide by the localgovernment, in another words, the local government need to raise funds by themselves tocarry out the construct of local infrastructure. Since the tax reforming, the balance ofpayment in local government was already insufficient, and the new local governmentsupporting policies of a4trillion project could only aggravate the conflicts. Therefore,financing through the debt became one and only impossible method for the localgovernment.It was written on the Chinese budge law that the local government does not processthe right to issue the government bonds, thus, local government can choose from the loanfrom bank or other financing platform etc. as alternative financing method. This choicewill lead the debt management of local government into chaos. Lacking of sufficientsupervision made the scale of the total local government debt increasing continually,along with the increasing of the risk of debt, all planted hidden dangers to our potentiallocal economic security and social stability.In fact, in an appropriate degree, financing through debt can promote thedevelopment of local economy, and it also have significant impacts on improvingpeople’s livelihood and coping with potential crisis etc. To prevent and resolve the debtrisk, the local government debt scale is controlled in a proper range, is very important tothe maintenance of China’s healthy economic development and social stability.To fit the purpose of study, this dissertation will separate into6chapters. The briefintroduction of each chapter is provided as follow.Chapter One contents the background of the research and the literature review forboth Chinese literature and foreign literature. It gives the basic rational of researchmethodology, direction of the study and the brief description of research approach. It alsoprovides the limitation of this research and future recommendations for scholars. Chapter Two covers the basic definitions for important concepts. And throughreorganizing and analyzing the local government debt of risk theory from the domesticand foreign studies, it shows that the theory will develop through change of time.Chapter Three analyses the current situation of debt for Chinese local government.It gathers important research data from Chinese Audit notice and Chinese statisticalyearbook, and this part gives an analysis for the current Chinese local government debtrisks. This chapter provides the evaluation of debt risk status for local government inChina at present.Furthermore, Chapter Four focus on analyzing the causes of the risk of Chineselocal government debt, which contents two sections. Firstly, starting the analysis from thereality of the situation of China, through the reform of tax sharing system, performanceevaluation system, the relevant legal system, debt management system, these four aspectsprovided the actual causes of debt risk of local government in our country. Secondly,using game theory to evaluate this issue, the game between local governments and thegame between central government and local governments, these two elements couldprovide a sound cause for local government’s borrowing behavior.Chapter Five introduced the advanced international experiences of preventing andresolving the local governmental debt risk, mostly based on American, Japan and EU.Through examining these three nations and regions’ advanced experiences, this chapterconcludes that if China wish to prevent and to resolve the debt risk sufficiently, ourcountry should given local government the right to issue the debts at an appropriatedegree, at the same time the government should strengthen the construction of legalsystem and management of the debt system.At last, through the analysis of the above reasons and foreign experiences, ChapterSix points out the direction for debt risk management for Chinese local government.From “financing the debt”,“using the funds” and “payment of the debt”, this chapterpresents some countermeasures to prevent and guard against risks of local governmentdebt in China.