A Study On Risk Of China’s Local Government Platform And The Management Countermeasure

The U.S. subprime mortgage crisis in 2007 have a profound impact on the global economy, which spread from the United States to global, eventually evolved into a global financial crisis. In response to the financial crisis, governments have adopted an active fiscal policy and easing monetary policy.Iceland’s sovereign debt problems surfaced in October 2008. "Bungy Five PIIGS"(Portugal, Italy, Ireland, Greece, Spain), confronted with the economic downturn and debt, the whole of Europe is facing a severe ordeal. In essence, the European sovereign debt crisis is the response to the financial crisis caused by U.S. Sub-prime mortgage crisis by EU, to prevent the emergence of economic contraction. While the implementation of an active fiscal policy, made the fragile financial situation of EU worse, and eventually led to unsustainable debt sovereign debt crisis.After the global financial crisis, to fight the crisis caused by the economic recession, our government also adopted a active fiscal policy and moderately easing monetary policy. In November 2008, the state introduced a 4 trillion yuan economic stimulus plan to achieve the goal of "maintaining growth, people’s livelihood, stability", of which 2.8 trillion yuan should by provided by local governments and social capital to support the implementation. At the same time local governments have also launched their own investment plans. In this context, the local governments proposed a massive increase in government debt through local government financing platforms, making the local government financing platforms an explosive growth of the number and size of liabilities. The actual size and risk profile of China’s local government debt caused great concern in the community.In this regard, we mainly do the following work:The first chapter is an introduction, which mainly introduces the background, main questions, the object and scope of the research, structural arrangements of the article, and the key concepts to the article.The second chapter is the emergence of the current situation of local government financing platforms, it analyzes the inevitability of the emergence of local government financing platforms. Local governments in China act the production functions and "only GDP" theory performance concept, resulting in the expansion of local fiscal expenditure. Local governments can not directly borrow over a longer period bound by law, tax reform led to a substantial reduction in local fiscal revenue, and other factors led to the emergence and expansion of local government financing platform. At present, debts of China’s local government financing platform is mainly characterized by the eastern area of the larger loans, investment in concentrated industries, longer term of the loan and so on.The third chapter is analysis on risk of local government financing platform debts, mainly analyzing the risks on the financing platform, the financial institution, the government and macroeconomic. Financing platforms usually borrowed excessive borrowing due to implicit government credit guarantee. Due to the serious asymmetry of information banks can not get the debt scale and solvency exactly of local government and financing platforms, they subjectively believe that the government will not default and wantonly increase local government financing platform loans. While the guarantees provided by local government is not legally effect, that would lead to liquidity risk and concentration risk for the banks. Since the debts of local government financing platform belong to local government essentially, mainly rely on local government revenue(including revenue from use right transferring) to repay, once the financing platform could not repay the debt, banks could only collect from local governments, and thus the local governments would undertake greater pressure. If the financial risk of banks and the local governments can not be resolved, and further upgraded, resulting in macroeconomic system risks, including economic restructuring troubled, macroeconomic structural imbalances, high prices of real estate, increasing the degree of social disharmony.The fourth chapter is analysis of strategies for the central government to resolve the risk of local government financing platforms debt and the existing problems.The central government established the financing mechanism for local governments to issue bonds, but a mature local government bond market does not exist, the market is improper interfered by local government in administrative means, resulting in the issue price deviated, investors in the market have no interest in the government bonds. Creditor banks of local government financing platforms had to purchase local government bonds constrained by the national policy, making the interest income substantially reduction. Ministries strongly promote the PPP model, which is applicable to creating "user pays" project, it could not solve all the problems of government investment projects.The fifth chapter is further research on resolving the debt risk of the local government financing platforms.Our government should propose the transformation of government functions and improve the tax reform to solve the risk of the local government financing platforms fundamentally.The sixth chapter is conclusion and outlook. The main conclusions of this article : the debt risk of local government financing platforms would lead to financial risks unless timely and effective resolved, even effected the macroeconomic. The central government has begun to establish financing mechanisms for local governments to issue bonds in order to resolve the risk. The central government also needs to make more efforts to resolve the risk.