An Empirical Study On The Rational Issuance Scale Of Chinese Local Government Bonds

In August 31, 2014, a new budget law was passed, allowing the authorized province, autonomous region or municipality to issue the local government bonds to raise the necessary funds for construction investment within the limits prescribed by the State Council, which opens a window for the local government to issue the local government bonds. Before that, the local government bonds were illegal but they actually existed. According to the latest audit results published by the National Audit Office, the total local government debts in China have reached about 17 trillion by the end of June 2013, among which, the government has responsibility to repay around 10 trillion. The high risk of the government debt is a big threat to the health of our economic structure. With the spread of a new round of the tax reform, the stock of local government debt will be included in the budget management, which will be resolved by issuing the local government bonds and the "PPP" mode. With the coming of China’s New Normal, the local government bonds will spring up in the future, and the local government financing history will turn a new chapter. As a result, the study of the issuance scale of the local government bonds is of great significant.For several reasons, Chinese local government bonds exist as two forms: the city investment bonds and the local government bonds issued by the central government. Neither of them belongs to strict local government bonds, but they actually play the role of local government bonds, which causes difficulties for authenticating the issuing scale of the local government bonds. What is more, the local government budget is not transparent enough, and the existence of city investment platform makes it difficult to define the local government debts, all of which create immense obstacles for our research. Firstly, after stating the realistic foundation and the law jurisprudential evidence of the existence of Chinese local government bonds, this paper analyzes the real scale of the local government bonds and tries to find out the content of the issuance. Besides, the comparison between this local government bonds and the General Obligation bonds of municipals reveals that these two bonds are essentially the same. The two-hundred-years’ experience of the GO bonds provides a reference for our local government to issue bonds in the future. Based on the qualitative analysis and theoretical research, this paper selects the panel data of 50 US states from 2006 to 2012 to take an empirical analysis, which includes hybrid least squares, LSDV, individual effect, fixed effects, random effects and Houseman test by the Stata statistical software. Finally we determine the most suitable model and get the factors that influence the GO bonds scale and the model formula. In order to offset the impact of the different national conditions, we continue to analyze the proportional relationship between the issue size and the influence factors in the empirical basis. We take the panel data of the municipal units into account to find out the reasonable proportion index, and use the data of China to have a test. Finally we get the reasonable scale range of the local government bonds.In conclusion, this paper puts forward some policy suggestions from three aspects: establishing a standard institution, considering the influence factors and index mechanism and issuing the other kind of bonds.