The Research On The Precaution And Elimination Of Local Government Debt Risk In China

In recent years the European, as well as American, sovereign debt crisis has attracted worldwide attention. However, the government debt risk is anything but new things. The last century has witnessed Latin American and Russia debt crisis in 1980s and 1990s, which have not received enough attention for the reason of the poor country lies in the periphery global economic and financial system. For the same reason,when the subprime mortgage crisis and the resulting European and American debt crisis occurs in the core area of global economic circle, it has been widely discussed. China has risk of government debt too. However, what needs to be emphasized is that, due to China’s sovereign debt has been relatively stable, local government debt is the main discussion topic. Due to local government usually circumvent the budget law with the help of a variety of ways such as financing platform, so this paper consider the local government in reality.Shortly after 1949, China’s local government was once allowed to raise debt. And the second time when local government has been allowed to raise debt is 1978, which is the beginning year of the famous period of the "Reform and Opening up". However, the local government is punished in 1988 for their non-standard behavior, which had brought about systemic risk. After Deng Xiaoping’s southern China trip in 1992 and reform of the tax system in 1994, the local government debt scale up again, luckily with the help of high speed development of economy, it did not caused much trouble. In the time of the two financial crises, which happened separately in 1998 and 2008, the infrastructure spending surged, but the public revenue growth declined, deepening the crisis of local government debt. In 2011 and 2013, the Audit Commission has launched twice national audit of local government debt, then the NPC has amended the budget law allowing local governments to raise debt in 2014, and the State Council has published "management of the local government debt "in 2014, the MOF is pushing emerging financing way such as PPP and implementation of the one trillion to reset debt.In one word, more and more people have realized the importance of solving the local government debt crisis.Under this background, this paper defines the concept of local government debt and local government debt risk, discusses the classification of local government debt and the theoretical basis of the formation and growth of local government debt, which is explained from the angle of public goods and principal agent. Then the development process of local government debt is briefly reviewed. Based on the audit report on the local government debt, this paper describes local government debt from aspects of structure, the government level and so on, drawing the following conclusions:the overall risk of local government debt is under control, but some structural risks are worth attention. Then this paper tries to find the answers for the fact that the local government debt has surged so quickly from the angles of financial, economic, and political. Then this paper summarizes local government debt management experience of the United States and Japan. Combining with the latest developments in the domestic law and policy, this paper try it’s best to find measures to guard against and defuse local government debt risk in China from the angles of public finance, economics, politics and so on.In the aspect of public finance, the solutions contains ensuring the income balances the expenditure, standardizing the transfer payment system, allowing local government to raise debt moderately. In the aspect of economics, the solution contains permitting market to decide prices of municipal infrastructure products, providing long-term financing vehicles, promoting the use of the PPP. In the aspect of politics, the solution contains reform of official assessment system, regulating the functions of the government.