The Moderate Scale Estimates Of Local Government Debt Based On KMV Model

Since the reform and opening up, China has made considerable progress in economic construction and further enhanced the level of urbanization. In order to fulfill their social functions and support the provision of public goods and services, local governments have increased investment by debt, expanding local government debt scale. Starting from the financial crisis in2008, for the purpose of developing the economy, the central government raised a four trillion investment plan and required local governments to provide matching funds. Under the condition of lacking financial resources, local governments built large-scale financing platform to raise infrastructure funds to cover the financial gap. In2013, National Audit Office conducted a nationwide inventory of government debt. The results showed that, to the end of June2013, the governments of the whole nation bear the responsibility to repay the debt of20.7trillion RMB,10.89trillion of which is the local governments’debt. Local government debt’s continues expanding may lead to huge financial risks, which is not conducive to economic development and social stability. Therefore, research on the safety scale of local government debt is of important theoretical and practical significance.Domestic scholars’ study on the size of local government debt can be seen in various journals, but little of them are systematic ones. The main idea of this paper is to estimate the safety scale of local government debt in different calibers based on KMV model, providing a reference for the local government in debt financing. Firstly, the scientific definition and classes and analysis of the theoretical basis and the necessity of the existence of local government debt are given. Based on this, the debt condition of30provinces or municipalities are comparative analysed from5points of view, i.e. the debt level, the region, the subject, the source of funds and debt pressure. Furthermore, a brief summary of the current situation and the scale management problems is given. Next section is the case study based on KMV model, which is the key and most difficult part. The basic idea is as follows:the local government assets was taken as collateral for debt repayment; if the the assets is enough to cover maturing debt when the due date is coming, then the local government will not default; and vice versa. We built three models in Matlab empirical analysis to calculate the debt scale in2013-2015which can be covered by the local governments’assets in small, middle and big caliber specifically under the default probability of0.42%. The results were comparative analysed to reflect China’s local government debt risk comprehensively and objectively. The experiment illustrates that the overall risk of China’s debt scale is controllable, but the region differences are significant. The more developed the region is, the smaller the utilization of the debt scale and debt risk are, which means it has space to continue debt financing. Among the30provinces or municipalities, Chongqing and Guizhou’s actual debt scale exceed the safety scale much more, containing a huge debt risk. It should attach great importance to take timely measures to control and reduce the debt scale and prevent the debt risk. Recommendations from four perspectives are proposed to effectively control the debt scale at last. They are: improving the local tax system, developing the transfer payment system, establishing early warning mechanisms for debt risk and other supporting measures, including rationalizing the specific relationship between government and the market, converting performance evaluation mechanism strengthening debt budget management and advancing financing mechanisms.