Local Government Debt Risk Of Shangdong Province And Its Influence On Regional Financial Stability

Since the introduction of the reform of tax system, property rights and powers of Chinese local governments are not match to the powers. And the local government debt problem increases prominently. To deal with the global financial crisis in 2008, the government introduced an economic stimulus plan of 4 trillion, which promoted economic growth but bringing the local government debt risk. With the slowdown of economic growth, the debts come into the repay period gradually, but the solvency of local governments is limited. Local government debt risk is widely concerned. Since local government debt is closely related to financial system, it’s important to control debt risk effectively which may occur financial risk and affect financial stability. Therefore, it’s meaningful to study the local government debt risk and regional financial stability with positive method. I choose Shandong Province as an example in this paper, using quantitative analysis method to construct the local government debt risk index and regional financial stability index, and do research of the influence caused by local government debt risk of regional financial stability innovatively.Firstly, this paper define local government debt risk and regional financial stability, and describes the relevant economic theory, which provide fundamental basis for the article; then expound the ways in which local government debt risk influent regional financial stability,and prove the rationality and necessity of the study.Secondly, based on the summary of influence factors of local government debt risk and regional financial stability, I use principal component analysis to measure local government debt risk and financial stability of Shandong Province, and the two indexes can truly reflect the actual fluctuation.Then I established the VAR model to test the impact which local government debt risk make on regional financial stability with local government debt risk index and regional financial stability index.At the end of the paper, on the basis of the conclusion of empirical study, I proposed corresponding countermeasures and suggestions respectively to the local governments, financial institutions and regulatory authorities, which can help them to control of local government debt risk more comprehensive and keep stable of the regional financial system.The innovation of this paper is that measured local government debt risk and regional financial stability of Shandong Province, and draw the conclusion that there has been a general uptrend of local government debt risk and decline trend of regional financial stability. Then this paper did research of the influence which local government debt risk make on regional financial stability effect, and draw the conclusion that the increase of local government debt risk can make significant negative effects to regional financial stability rapidly. But limited by the availability of data, there have been imperfections on selection of indexes and empirical results are some limitations.