A Study On The Debt Risk Of Local Government In China

As the international financial crisis develops, government debt crisis occurs worldwide. Local government debt risk of China gradually becomes a focus, drawing attention from all walks of life and attracting interests of doing researches on the subject, both domestic and overseas. Various conclusions differ with each other. How to effectively manage the government debts, prevent debt risks and maintain financial stability to develop in a sustainable way has become a worldwide topic.The paper analyzes the current situation of local government debts in China via the data of 2011, 2012 and 2011 national government debts audit results. Viewing from the debt balance structure, all levels of local government debts are growing rapidly. The municipal government has became the main body of local government debts, the ratio of debts assumed to be paid by the county and township governments is high, the debt repayment pressure is heavy for them. Looking from the sources of debt borrowing, although the bank loan is still the main source of financing, with the rapid development of BT and trust financing, the government debts face new risks. Viewing from the debt principal, the raising financing platform is still the main body. Looking towards the debt using direction, municipal constructions and other public projects are the main investment fields, but most of the projects themselves can not obtain stable cash flow incomes, so the debt repayments still need government guarantee. Viewing from the distribution of debt maturities, the debt pressure will be eased year by year, but the project cash flow and debt maturity does not match, which would easily bring ‘liquidity risk’. These problems are directly related with the duties of local governments do not match their property rights, the soft budget constraints, the local government debt management disorders.The paper evaluates the local government debt risks by the use of debt rate, liability ratio, the rate of overdue debt and the government debt to GDP ratio. It finds that the risk index is still in the manageable range and far below the international warning line. Then, based on the balance sheet, using debt sustainability model as a tool, the paper assesses the local government debt sustainability, finds that our existing operation model of local government debt will face unsustainable risks in the future.Based on the above analysis, the article suggests that measures should be made to deal with local government debt risk under the principle of ‘learning management, while development’. Firstly, the local government debt risk warning mechanisms should be established. Secondly, the local government need to reduce its loan demands and control the scales of its debts via changing its functions, improving the financial governance distribution system, standardizing the issuance mechanism, promoting the PPP financing model and etc.. Thirdly, local government debt risks should be reduced in the using link through ways like standardizing mechanism of local debt financing, strengthening the budget management of local debt financing. Fourthly, in order to realize the social supervision and prevent local government debt risks, the debt repayment mechanism of the local governments and the system of financial report and information disclosure needed to be improved.