Research On Credit Risk Management Of Local Government Funding Vehicles For The Dongguan Bank

The Local Government Funding Vehicle (hereafter abbreviated as LGFV) isunique in Chinese bond market. It is similar to the overseas municipal bond. Both werecreated for the financing demand of local government. But it still has too muchdifferences from the municipal bonds. As the LGFVs become important financevehicles of local government, together with increasing the finance activity of localgovernment, a large amount of city investment corporate were issued, and it hasbecome an important type of the credit bonds.As the amount of city investment corporate become large day by day, so the creditrisk of LGFVs has been accumulated to a high level. Therefore the risk management ofLGFVs becomes more and more important. The public rating system cannot reflect thereal level of its credit risk, because the characteristics of credit risk of LGFVs aredifferent from other credit bonds. Therefore, it is hard to control the credit risk ofLGFV. Based on its investment experience of LGFVs, the Dongguan Bank hasdeveloped and put into trial operation a significant method for the risk management ofLGFVs. The core of this method is a private rating system. Its rating process combinesboth element of the issuer financial situation and the local government financialstrength, depending on the private rating system, and then as a reference for investingdecision and credit risk management.The article summarizes implementation effect of private rating system, and withthe analysis the characteristic of LGFVs again, it tries to obtain more comprehensionof risk characteristics of LGFVs. It also uses a large amount of data and case analysisThen it gives some suggestion about how to improve the model, to improve riskmanagement level of bond investment for the the Dongguan Bank.