Research On The Debt Risk Of Local Government In China And The Legalization Of The Risk Prevention

Tax reform changed the configuration of power and financial authority between central and local government. Local governments play an important role in providing public services and boosting economic development, and it is heavy in demand for expenditure, with fast urbanization and raised people's living standards. Inspired by the GDP-core performance evaluation mechanism, the local government is constructing the infrastructure with large-scale borrows in finance. Two decades after 1994, the budget law prohibits local governments to issue bonds, with results in heavy financial pressure and ignorance of the policy of local government. They start financing by their local government platforms. The invisible debt financing of local government has resulted in a lot of explicit debt and direct debt, and innumerable implicit debt and contingent liabilities. In addition, the lack of effective management of local government results in some structural problems, and the debt risk of it cannot be ignored.In recent years, the central government takes some effective measures with some success in debt risk management of local government. In 2014, the revised Budget Law and related policies and regulations make the effort obvious in paying attention on the issue of local government debt risk, which means increased provision to allow local government borrowing debt, and clear specifications in the debt subject, purpose, size, and other ways. However, the management issues of local government debt according to the new "Budget Law” is too general with only frameworks, and the specific details have yet to be improved, like the distribution of revenue between the governments, and the control and transfer payments, etc., and the budget is limited in solving the issues relate to such debt risks. Local government debt risk is mostly about risk prevention and control. With this in mind, this research is divided into five parts in debt risk analysis of local government, and makes suggestions with Legalizing:In the first part, general theories of local government debt will be introduced and analyzed, including the definition, classification, and the theoretical foundation of local government debt issue, both in status quo and in history. It aims to have a clear understanding of the issue and the reasons and necessity of debt existing in local government.The second part will be a thorough analysis of local government debt risks. The definition of local government debt risk will be first introduced to make it clear, then a detailed analysis of specific situation of China's local government debt risk will be followed, with emphasis on the manageability of the overall debt risk and its deserved attention. Finally, the negative impact of local government debt risk in economics, politics and society will be analyzed and discussed, to demonstrate the urgency in the debt risk prevention and control of local government.The third part mainly focus on the reasons for the rising and expanding debt risk in local government: the over-commitment and excessive powers of the local government and its heavy expenditure responsibilities, in the lack of adequate financial revenue. In spite of this, the local governments is still being unreasonable inspired by the performance evaluation system and tenure systems, continue to enlarge the scale of debt, expand land finance, which all result in the instability of local government finances. So, only by having a full understanding of the arising debt risk of local government can we be targeted to take risk control measures effectively.In the fourth part, enacting measures for the control of local government debt risk taken by our country so far will be summarized, with analysis of the current difficulties local government is facing in debt risk prevention and control. Based on the complete understanding about debt risk prevention and control, with the lessons learned, we can take new supplementary measures from a bigger picture, and establish a debt prevention and control system in our legal framework.In the fifth part, specific legal suggestions based on our current situation of and lesson learned from local government debt risks will be provided. It includes the optimization of inter-governmental fiscal relations, changing and regulating local government functions, control of local government powers and expenditure responsibilities. It all aims to protect the revenue of local governments, legalize the management of local government debt, improve government performance appraisal system, and inhibit the excessive borrowing of local government.