The Research On Prospects Of Bond Financing Of China’s Local Goverments

With the improvement of the layered taxation system and the deepening of the reform of the capital markets, local governments at all levels have to shoulder more responsibilities in urban renewal and development. It is imperative for them to openly seek external bond financing. On Oct.20th2011, Ministry of Treasury put into effect and implemented the Provisions on Bond Financing of Local Governments, allowing the pilot debt-financing program of Shanghai Municipality, Zhejiang Province, Guangdong Province and Shenzhen Municipality. This pioneering program could be seen as the ease of legal provisions and the commencement of autonomous bond financing activities of China’s local governments.Autonomous bond financing would introduce into the external financing mix of local government revolutionary structural change. Major financing channel would shift from indirect financing, mostly bank loans, to direct financing, most of which are bond financing. This structural change could significantly expand financing channels, greatly improve the market-oriented financing capabilities and effectively relieve the debt burden of local financing entities. Local economies could also benefit a lot. Meanwhile, the introduction and trading of local government bonds (that is, China’s municipal bonds) would facilitate the deepening reform of China’s booming capital market. One of the core issues of local governments’debt financing is risk management. Such risks could be categorized as two types:economic risks and socio-political risks. Among various economic risks, credit risk seizes most of the attention. Management and control of credit risk is one of the central topics of economic risk management. In this thesis, ARMA and KMV models are employed to make quantitative analysis on the relationship between the size of due debt payment, including interests and principals, and the theoretical expected default probability. The sample cities of this research are Guangzhou (Guangdong Province), Hangzhou (Zhejiang Province) and Suzhou (Jiangsu Province).China’s financial infrastructure should be improved to contain the risks of local governments’debt financing activities. Legal regulations and market supervisions should all play their part. Laws, rules and provisions should be implemented and put into effect to guarantee the high credit level of the issuers and market mechanism should also be activated to cautiously monitor the whole process of underwriting, issuance and trading. An integrated system of credit rating, information disclosure and bond insurance should be timely set up to effectively reduce the risks stemmed from local governments’bond financing.