A Study On Legal System Of Local Government Bonds Insurance In China

With the amendment of "Budget Law" in 2014,China officially removed the legal obstacles of local governments’ qualification as a debt subject, since then, local governments issuing bonds on their own has formally embarked on the stage of history. The central government giving some autonomy to local government in debt arrangement, in fact, is directly pushing the local government to the forefront of the market economy, which reflects the progresses both in law and concept. However, after the gate opening is Oasis or floods also need the time to test, and it had to attach great attention to the risk prevention and control of government debt. Compared to European and American countries, local government issuing bonds in China still remains a short time, being inadequate no matter in theory or practice, lacking of relevant laws and regulations, not being perfect in supervision, risk prevention mechanism, debt management and supervision mechanism. The series of problems above may easily induce systemic risks. Under the background, a large number of investors generally lack sufficient self-protection ability, then it is necessary to give special attention and protection to system design in the future legislation. Basing on the American practice, it shows that local government bonds insurance system is one of the most effective means.The local government bonds insurance is a system in which the local governments who has rights to issue bonds, as policyholders, pay premiums to a specific bond insurance agencies in accordance with a certain percentage of the amount of its bonds, once the local government cannot perform its payment obligation to the investors based on investment agreements due to the financial crisis, it shall be indemnified by the bond insurance agencies within the insurance liability limit. It is a unique form of bond credit enhancement. The United States is the first country to establish bond insurance system which is the most stable around the world, being relatively comprehensive and systematic both on the theory and practice of municipal bond insurance system. The establishment of municipal bond insurance of the U.S. has played an important role in the prevention of local government debt risk by saving the cost of the issuer, providing an additional safeguard for the investors and the introduction of multi-market players to participate in local government bonds, which is an important reference of China.To be specific, we can learn from the experience of municipal bond insurance system in the U.S. by the establishment of local government bonds insurance system. As an insurance policy, requiring local governments to purchase compulsory insurance when issuing bonds which is underwritten by independent insurance companies under specific insurance contracts. In this way not only can suppress the urge of local governments to issue bonds, but also can make the timely compensation for investors to prevent the risk of financial crises.