Study On The Sustainability Of China’s Local Government Debt

The healthy and sustainable development of local government debt is important for China’s economic development and social harmony and stability. With the rapid development of China’s economy, the rapid growth of local government debt has been the fact that can not be ignored. Although the local government has not yet been a debt crisis, but whether there is a risk gets more and more scholars’attention. Therefore, it is of theoretical and practical significance to study the sustainable development of local government debt in China.Firstly, this paper on the basis of the two comprehensive audit data published by the National Audit Office, estimated the size of debt of Beijing and other 26 provinces (autonomous regions and municipalities) ever since 1994, analyzed the evolution of the development of local government debt. Secondly, according to the inter-temporal budget constraint and a linear feedback function, obtained the test conditions for No-Ponzi-game Condition, through the System GMM method to estimate and test the basic model, come to the conclusion that the No-Ponzi-game Condition was established, that is, the local government debt is sustainable, on the basis of this, we took the sensitivity analysis of the factors that affecting the debt ratio. The government bond market is considered only from the perspective of inter-temporal budget constraint, then we based on the perspective of economic growth for the further sustainable analysis, and used the random effects model to test the basic model, it is found that the debt of China’s local government has a critical effect on economic growth, and the debt-GDP ratio is 27.82%, which is more than the average debt-GDP ratio 19.34% of the local government in 2013, it further illustrates that although the regional debt differences in China, but overall the local government debt is sustainable.Finally, we are looking to the future of local government debt and emphasize that local government should control debt strictly under the economic new normal, otherwise the long-term sustainability of local government debt may be reversed. And on the basis of the analysis of this paper, we put forward policy recommendations to prevent the future of local government debt risk from three areas of the economic growth, fiscal discipline, improve the local bond issuance mechanism.