A Study On The Scale Of Security Issuance Of Chinese Local Government Bonds

Although China has not formally allowed local governments to issue local government bond,the central government has begun to make experiments. That means the central governmentbegin to prepare for the development of local government bonds. The Third Plenary Sessionof the Eighteenth Central Committee of the CPC also points out that local governments areallowed to broaden the financing channels for urban construction by issuing bonds. In thiscontext, it is extremely urgent to do research on security aspects such as risk prevention ofthe local government bonds. Safe issue scale is one of the key parts. Therefore, this thesisfocuses on the safe issue scale of Chinese local government bonds.Since there is no experience of our country to follow, this thesis begins with the analysis oflocal government bonds of other countries. This thesis selected three representative countries-the U.S., Japan and Poland. By analyzing the issue scale of local government bonds of thethree countries, this thesis finds that their issue scale of local government bonds keeps aproportional relationship with the total government bonds, the bond market size, GDP, localrevenue and total tax revenue and other indicators. Specifically, the issue scale of localgovernment debt is about35%of the total size of government bonds, approximately7.5%oftotal bond market size, around2.5%of GDP and about15%of local annual revenue. Theoutstanding local government bonds remained around23.9%of GDP and about120%oflocal annual revenue. All local government debt limit to60%of total revenue, etc. This thesisuses the proportional relationship to calculate the issue scale of our local government bonds.There are lots of differences between China and the U.S. bond market. Trading for corporatebonds and financial bonds is very active in the U.S. bond market, and these bonds currentlyonly have a small proportion in the bond market in China. Thus, using the total size of thebond market for reference is meaningless, so it is removed from the thesis. In addition to theabove indicators, this thesis also uses common international warning standards on localgovernment debt for developing countries-debt burden ratio and debt dependence ratio.Therefore, based on indicators and warning standards above, adhering to the principle ofprudence, this thesis selects smaller value in the calculation of the many reference value.Thus, the total safe issue scale of our local government bonds should be around836.27billion CNY, and the safe outstanding local government bonds should be around6.63trillionCNY. The above numbers are ideal size of safe issuance scale and outstanding scale, and infact our local government has formed a huge debt is clearly far beyond the ideal scale. But itdoes not mean local government can not issue local government bonds because the financialsituation of some local government is good even though the total local government debt is huge.On the macro level, the ratio method which is used to estimate the safe issue scale of ourlocal government bonds is simple, intuitive and easy to judge. On the micro level, besidesratio method, local government need a more accurate way to calculate the safe issue scale oflocal government bonds, which will improve the whole calculation system. Initially, thethesis tries to find a quantitative model to analyze safe scale of Chinese local governmentbond. But the U.S., Japan and other countries worked out the suitable issue scale by usingtheir own experience in previous years and did not raise the demand of studying quantitativemodel. Moreover, there is no ready-made quantitative model to use. If China started to issuelocal government bond, it will be a new exploration, there is no historical data or pastexperience to refer to. For issuing local government bonds, China is in its initial stage. Weneed a feasible method to estimate the issuing size in order to continuously improve it, andgradually formed our own management and control system for issuance scale of localgovernment bond. Thus, from the perspective of credit risk, the thesis makes sometransformation of KMV model, the quantitative credit risk model, to quantify the issuancescale of local government bond. Taking Shanghai as an example, the thesis uses regressionmethod to predict Shanghai local fiscal revenue in2013, determines the assurance percentageof local fiscal revenue, and then uses the transformed KMV model to draw the conclusionthat the safe issue scale of Shanghai local government bond is about135.6billion CNY andthe corresponding default rate is within0.4%.Finally, this thesis proposes some policy recommendations. In order to ensure the safe andeffective operation of local government bond, the following measures in operationalmechanism should be taken into action. First, choose bond issuer carefully and control theissue size strictly. Second, establish an open and transparent financial reporting system, bondassurance system, information disclosure system and risk warning system. Third, set up asinking fund and improve government credit rating mechanisms and quantification.