Financial Decentralization In China’s Economic Transition

In recent years, with the process of urbanization and industrialization, the development of China’s local finance is rapid and the local financial management system has been preliminary established. The financial management system, which was controlled by the central government in the past, is presenting a tendency towards local decentralization. The trend of local decentralization mainly reflected in the following three aspects:financial development localization, financial management localization, financial development marketization.While local governments actively try to support and develop local finance to promote the development of local economic, it is associated with very strong negative external effects, namely, the regional financial risks. Moreover these risks may expand to systemic financial risk of the entire financial system eventually. For example, unchecked expansion and cross-regional operation of local commercial banks owing to disordered financial competition of local government; frequent happening of financial cases owing to competitive establishment of all kinds of local financial markets; frequent happening the run case and the run surge which are resulted from the disorderly development of private finance; bankruptcy dilemma of an amount of guarantee companies owing to high-interest loans; cash chain breaking of many companies owing to interlinked guarantees; serious risks of local government platforms.In order to prevent the regional financial risks in the process of local financial development, the central government emphasizes on the role of the local government in the local financial management and supervision. How to understand the rapid development of the local finance and financial risks associated with the local finance’ development is particularly important and urgent, which need us to make a further study in theory. We try to summary the phenomenon of the localization of financial development and financial management localization as financial decentralization. Namely, one the one hand, the central government delegates part authority of local finance development and local finance management to local government; on the other hand, the government delegates part authority to the market. From the double perspectives of local government financial competition and financial risk prevention, after reviewing the financial decentralization and its’characteristic all stages between the central government and the local government, between the government and the market since1978, we put forward the concept of financial decentralization, then demonstrate the internal logic of financial decentralization by theoretical and empirical analysis.The thesis includes six parts totally.The paper begins with introduction the research background, research methods and innovations and shortcomings.The second part reviews the literatures related to financial decentralization, including fiscal decentralization and local government competition, the financial decentralization and local government intervention, decentralization theory in organization and decentralizing supervision system.The third part analyzes the evolution of financial decentralization, gives the definition of financial decentralization, including the evolution of financial decentralization in China since1978, the features of financial decentralization in different stages.The fourth part is the theoretical analysis. By constructing the theoretical model, we analyze the internal logic of financial decentralization from the perspective of local government financial competition and financial risks prevention.The fifth part is the empirical analysis. By constructing the empirical model based on the previous theoretical analysis, we use the data of six provinces from2005to2011, empirically analyzing the internal logic of financial decentralization.The sixth part is research conclusions.The main conclusions of this thesis are that financial decentralization refers to a series of dominant and recessive institutional arrangements about financial resource allocation, financial management and financial development; the financial decentralization is caused by local financing need for development, which is decided by the development stage of China’s economy and society endogenously and its evolution process is strongly linked to the reform of financial budget system, the reform of financial system reform and so on; the intergovernmental financial decentralization is the result of the vertical financial competition between local governments and the central government, the horizontal financial competition between local government and local government; whether to finance decentralization and the degree of financial decentralization depends largely on the central government’s trade-off between the development achievements of local economic and society (financial decentralization’s earning) and the financial risks of overflow negative external effects (financial decentralization’s cost); the degree of financial decentralization will significantly affect the local government’s initiative to improve the management of local finance and promote the development of local finance.