Local Government Debts Expansion And Solutions From The Perspective Of Financial Constraint

The rapid expansion of local government debts has become a major finan cial risk affecting the economic development of our country. The paper discuss es local government debts expansion in China Based on the financial constraint theory of Hellmann etc. This paper argues that in the case of deposit interest rate regulation, financial institutions will earn more than average profit under full competition in financial market, such as the deposit interest rate regulation of finance license created by the "franchise value"——financial constraints" po licy rent. Generally speaking, Central bank creates policy rent by regulating len ding and deposit interest rates, which production sector and financial institution s share together. Through a series of financial constraint policy, by creating pol icy rent in financial and production sectors, Central Bank’s aim is to improve the efficiency of financial market in allocating capital and financial ability to s ervice real economic development. However, in our country’s case, local gover nment financing platforms is equivalent to the production sectors under the clas sical financial constraints theory. Local governments that share the rents of fina ncial restraint policies seized by bank institutions through local-government fina ncing platforms will result in expansion of local government debt. Such financi al mechanism is the institutional root of the rapid expansion of local Govemm ent’s debts. This paper ultimately aims at establishing a unified and detailed an alysis framework to explain the mechanism and effects financial constraints affe ct the expansion of local Government’s debt and provide a new idea to address the huge debts of local governments, the financial constraint policies can impr ove the efficiency of financial markets and promote economic growth,while at t he same time, transfer depositors interest to financial institutions and the local government financing platforms. The long-term existence of financial restraint pol icy will not only lead to the expansion of the large scale of local government d ebt, but also cause a kind of support and the discrimination effect resulting from selected rents. The aim of financial policy is to promote real economic develo pment. When marginal social cost exceeds the marginal revenue of financial cons traint,financial constraint cannot improve the efficiency of financial markets and promote economic growth, thereby become a financial repression. The economic development requires a series of financial policies change which are incompatibl e with economic development. The key measure to solve this type of local gove rnment debts expansion is to change the irrational financial constraint policies an d eliminate the motivation of local governments to pursue the rents when conditi ons permit, namely the elimination of the rent,、the elimination of financial instit ution’s franchise value, which is to gradually achieve market-set interest rate.