A Study On Legal Countermeasures For Debt Risks Of Local Government Financing Platforms

The conflict between local fiscal capital insufficiency and expectations for local governments to develop economy in urbanization,coupled with the stimulation of a proactive fiscal policy and easy money policy,has led to the emergence of local government financing platforms.As a product of the loophole of law and policy,local government financing platforms have many risks such as false funding sources,poor refinancing capabilities,and malicious debt evasion due to uncertain future development of local economy,too much debt for local governments in comparison with their debt-paying ability,non-transparent regulatory mechanisms,too few financing channels,excessive competition because of local governments' pursue for record of achievements,commercial banks' insufficient abilities to regulate markets,and so on.Because local government financing platforms are naturally connected to local governments,the above risks will eventually trigger local debt crisis.In the meantime,the risks of local governmental financing platforms will cause ineffective macroeconomic control,decrease of financial stability,inflation,increase of bad bank loans,legal risks and so on.The debt risks of local government financing platforms have formed and increased rapidly with platform companies' development,resulting in expansion of local debt.Our government has continuously regulated local government financing platforms,however,a long-term regulatory mechanism has not been established due to difficulties in coordination among several administrative departments,the low rank of policy papers,too weak deterrent power of accountability mechanisms,lack of durable policies and so on.By studying the origin and development of local government financing platforms,analyzing debt risks in the platforms and borrowing ideas from foreign local governments' experience,we can find some ways for better normalized management of local government financing platforms and consequently prevention and mitigation of debt risks.We can get the following insights from foreign local governments' experience on debt management: Local governments should be given appropriate rights to issue public debts.Local government financing channels should be expanded within a controllable range.Local government debt management system should be perfected.It should be ensured that central government can tally and manage local debts more accurately.Normalized fiscal administration system should be established so that the fiscal power and administrative authority of local governments could be balanced.Meanwhile,we can also learn from foreign local governments' experience that we should choose debt management patterns and leading institutions for financial patterns suitable for us according to our conditions.It contributes to establishing local government financing platforms' features as limited liability,government-enterprise separation,and risk management to define financing platforms as special legal persons,to build modern corporate management structure,and to perfect the anti-risk system.This is also the foothold to prevent the debt risks of local government financing platforms.In addition,the current debt problems left over by history in local governmental platforms should be handled strictly in accordance with policies and regulations while follow-up financial support for projects under construction and institutional transition of financing platforms should also be considered so that those projects will not be shut down abruptly,which will cause stagnation or even regression of urbanization.Future debt risks of the financing platforms should be prevented with the principle of ‘increasing income and reducing expenditure”.To increase income,local government should be given the right to issue debts.Not only should local government financing platforms be issuers in bond markets,but also local government bond markets should be established.To reduce expenditure,local government should distinguish their reasonable funding needs from unreasonable funding needs.Administrative actions should be restricted by audit supervision,risk warning,stronger hard budget constraints,and legislation and judicature.Commercial banks' status should be improved in financial markets.Governments' borrowing should be restricted by tighter credit.Current tax-sharing system should be reformed.Financial transfer payment systems should be perfected.Laws and regulations should be modified such as ‘Budget Act'.As a result,the debt risks of local government financing platforms can be eliminated gradually.