A Quantitative Comparison Of The Subnational Government Debt Risk Between China And United States Based On The KMV Model

The financial crisis in 2008 led the state government of California near bankruptcy.In order to stimulate domestic demands,China arranged a fiscal stimulus plan which caused a great number of local government funding vehicles established and the debt they financed increased dramatically which added great pressure to the subnatinonal governments of China.Currently,the necessity of economy transition causes the government debt level to raise again.Government debt was a popular study topic,but in China,it was found that the studies on subnational government debt seldom quantified the risk nor provided with a real reference.We have clearly known the sources and features of the risks,but what we really need is the measurements to precisely control the debt,especially to predict the future risks.This paper argues that simply relying on traditional debt ratios cannot control the government debt risks.After investigating the municipal bond in US and the fiscal failure of California state government,we collected fiscal data of both the California state government and subnational governments of China.This paper intended to establish a new debt risk measurement with the considerations about volatility and towards the future.And Debt-Deviation Ratio(DDR)was set up from the improved KMV model together with the real matured debts amount.This paper calculated the DDR of California state government under three tests and found the DDR could give good explanations about the fiscal failure.Then DDR was used in subnational governments of China.We finally found that the DDR could indicate different risk level from the old measurements,and the risk of several Chinese subnational governments is even higher than that of California.Though it showed high risk on subnational government debt,the overall risk would still be under control during a short period in the future.Subnational governments of China should continually improve the skills to manage debt,and reasonably utilize the debt by focusing on economic situations.They should also avoid raising debt blindly and should increase the transparency of fiscal information.Budget constraint should be gradually hardened,and repaying the debt through excessively reducing the common welfare of citizens is not acceptable.