The Legal Governance Of The Debt Risk Of Local Government Financing Platform Companies

In early2009," Guiding Opinions of the People’s Bank of China and ChinaBanking Regulatory Commission on Further Adjusting the Credit Structure toPromote the Rapid yet Steady Development of the National Economy " was issued,which proposed the formation of local government financing platform companies andthe distribution of companies bonds, medium-term notes and other financinginstruments in order to broaden financing channels for the matching funds ofinvestment projects established by central government. With the recognition andsupport of national policy, local government financing platform companies entered astage of rapid development. Along with making up for the lack of financial resources,massive problems concerning financing platform companies have been revealed, suchas excessive debts, lack of governance institution and nonstandard regulatorymechanism, which sparked great concern for financing platform companies. In factthe implicit guarantee and the credit support of local governments will lead tofinancial risks and fiscal risks instead of helping financing platform companiesrespond to its huge debt burden. As a result, if not sorting out and improving the debtand governance timely, it is bound to evolve into real debt crisis, and brings aboutdetrimental impact to the sustained and healthy economic development and socialstability.Local government financing platform company debt is the contingent debt of the local government, of which the risk has attracted national departments and academicattention. This article will inquire the mode of operation and the legal nature of localgovernment financing platform companies, and through analyzing the financingplatform companies credit risk, including financial risk, legal risk and other risks andtheir causes, the path of legal governance will be made clear and the financingplatform company will be lead to the road of standardized operation.This paper is divided into four chapters, and its logical structure is as follows:The first chapter presents the nature and the operation of local governmentfinancing platform companies. This chapter tries to sort out the operational status quoof local government financing platform companies at the factual level, summarize itsfinancing model, the way of security and the operational process in order to restorethe factual basis of the company’s debt risk, then comments on its legal nature andbasic functions.The second chapter focuses on the main risk of local government financingplatform companies. The debt risk is mainly reflected in four aspects: legal risk, creditrisk, financial risk and moral hazard. Due to the accumulation and conduction, the riskwill impose strong negative effects on government finances and financial systemultimately.The third Chapter explores the causes of local government financing platformcompanies’ debt risk. Public financing needs and the unsound associated system is theroot cause of the risk of the financing platform company debt, which makes the debtrisk of the financing platform company a certain kind of inevitable. Meanwhile thecompany is also facing other different internal and external risk incentives, such asunclear positioning, imperfect governance structure, lack of monitoring mechanisms,implicit government guarantees, etc.The forth chapter is about the legal governance of local government financingplatform companies debt risks. This chapter proposed legal countermeasures in termsof the debt risks from external constraints and internal governance, including:institutional restraining of local government financing behavior, regulating theestablishment and operation mechanism, improving legal supervision mechanisms and establishing a government relief system.