Study On Credit Risk Of Chinese Local Government Bonds Based On KMV Model

With the deepening urbanization in China,the infrastructure construction and the basic industry investment will increasingly rely on the financial support of local government,which will cause great financial pressure to the local government.In order to solve the capital insufficiency,the local government in China has made various disguised debt and bad debt to raise funds.In such situation,the expanding scale of debts has been out of control and the forms of debt have become more invisible.All these factors bring great financial risk to Chinese local government.As is known to all,it is formal and feasible to issue local government bonds as the vital method to raise funds.Especially with the promulgation of newly revised laws in 2015,it became legal for the local government to issue bonds independently and fund local development.Under the encouragement of laws and regulations,the scale of local government bonds has become much bigger rapidly and caused great concern.So,it has been a high focus of local government about how to measure the issue size and credit risk scientifically and control the local government bonds risk.In such situation,the dissertation made the brief theoretical analysis from the local government bonds history,the status quo of the issuance and the credit risk sources and then carried out the empirical research based on the modified model of KMV.In the empirical research,the dissertation selected the financial panel data from 10 representative provinces as the sample and made the quantitative analysis of the credit risk caused by local government bonds in order to calculate the probability of default and the safe issue-volume of local government bonds.Based on the empirical research,the dissertation has two findings.Firstly,among the 10 representative provinces,there are four provinces whose local government bonds issue size has exceeded their safety size and caused greater credit risk,that is,Henan province,Hunan province,Sichuan province and Yunnan province.Then,the central and western provinces in China have greater credit risk.The issue size of some provinces has even exceeded the local financial capacity.According to the status analysis and the empirical research,the dissertation has three conclusions.Firstly,it is formal and feasible to issue the bonds for the local government when combined with the actual financial demand.Besides,the local government bonds issue should also meet the related requirements from the Ministry of Finance.Secondly,the probability of default will become significantly sensitive to the issue size when the local Government Issue size has been up to a certain volume,which means that it is key to scientifically calculate and predict the safe issue volume of local government bonds.Lastly,the capital market should realize the existence of the credit risk from the local government bonds issuing and then take measures to make reasonable evaluation and control.