The Research On Monetary Effect Of Local Government Debt Replacement

Local Government Debt Replacement refers to the local government issuing local government bonds to replace the stock of non-bond debt under budget management.At the end of 2014,the local government debt amounted to 15.4 trillion,of which more than 90% existing in the form of non-bond.The local government debt risk was increasingly becoming the focus of whole society.To relief the pressure of the local government debt,approved by the State Council,the Ministry of Finance began to implement the Local Government Debt Replacement in 2015.Then the issued replacement amount was 3.2 trillion.In 2016,it reached 5 trillion.As a new kind of fiscal policy tool,Local Government Debt Replacement involves government debt,public finance,monetary,investment,and other fields.Several government departments should cooperate with each other in the process of policy implementation.Especially,the monetary effect should be the concerned issue.The current domestic and international literatures on this theme are still relatively weak.Based on the micro-mechanism of money supply,the financial institutions' balance sheets,and the hierarchical structure of liquidity,the paper analyses and evaluates the short-term and long-term effect of banking system liquidity,money supply and monetary policy made by Local Government Debt Replacement.The research conclusions can provide reference for the coordination of monetary policy in the subsequent implementation,and relevant research methods can provide reference for the study of the coordination of fiscal and monetary policy.This study finds that Local Government Debt Replacement affects the money supply from the channels of treasury and monetary creation.Local Government Debt Replacement makes short-term shock on the liquidity of banking system through treasury receipts and payments.The policy will increase M2,and the specific impact depends on the form of existing local government debts.The replacement of bank loans,corporate bonds hold by bank,and "bank's shadow" do not affect M2.The replacement of corporate bonds held by non-bank institutions,traditional show banking financing and other debt lead to increase M2.After introducing the basic situation of Local Government Debt Replacement,the paper evaluates the monetary effect empirically.The study finds these results:For a small amount of funds remaining treasury,Local Government Debt Replacement made certain effect on the banking system liquidity from 2015 to 2016.The initial liquidity shock was between 600 billion yuan per year to 750 billion yuan per year.The financial department's serial measures,including advancing treasury cash management,speeding up expenditure,and revitalizing stock funds,hedged part of the liquidity impact.The total amount of M2 created by Local Government Debt Replacement will reach 2.4 trillion,and about 800 billion yuan per year.In the long run,the money will "deposit" down.The policy promoted the development of local government treasury cash management accidently,and it may influence monetary policy operation persistently.The central bank gained a new tool to create money base,as local government bonds were qualified as collateral(pledge)in certain monetary policy operation.This paper argues that the policy made some difficulties to treasury management,disturbed monetary and financial indicators,and squeezed the space of monetary policy.To strengthen the coordination of fiscal and monetary policy in the implementation,this paper proposes establishing fiscal & monetary policy coordination mechanism,deepening the reform of treasury management system,improving the ability of monetary policy to deal with spontaneous factors,and strengthening government bonds in the role of monetary policy.In the further discussion,the paper argues the policy contains the trend of money creation mechanism.Bond business,typically government bond business,will play a more important role in the money creation and monetary policy operation in the future.Of course,there are still many shortcomings in this paper.In the theoretical analysis of the monetary effect of Local Government Debt Replacement,there is no unified quantitative model.The quantitative evaluation is based on the balance sheet analysis,and the accuracy of the evaluation need to be further strengthened.