How To Reduce Financing Costs Of Local Government Financing Vehicles In Their Transformation?

Local Government Financing Vehicles(LGFV)are products of China's special national conditions.At a time when local governments could not issue government bonds on their own,LGFV have long played the role of government financing vehicles.Since the global financial crisis,LGFV with rapid growth in quantity and scale have made great contributions to economic development.Meanwhile,they exacerbated the problem of hidden local government debt.Since 2015,the new Budget Law grants local governments the right to issue government bonds on their own.The era of local governments relying on LGFV for financing is coming to an end Losing government credit endorsement and repaying existing debts independently,LGFV must be transformed into market-oriented entities.Because LGFV undertake public service functions and participate in large-scale infrastructure construction,their financing needs remain strong while it is impossible to continue to rely on explicit government guarantees to obtain low-cost financing.This paper studies the effects change and changing tendency of different factors on the financing costs of LGFV before and after their transformation and uses different samples for robustness test to get more credible conclusions.Finally,we give a more detailed description of the effects changing trend using rolling sample test method and display the test results intuitively.We find some new measures and methods which have little effect on reducing the financing costs before 2015 but have significant effect in the process of LGFV transformation*.The new initiatives of the local government are to improve the financial situation and provide subsidies to LGFV.LGFV's own new methods include properly controlling the duration of bond issuance,allowing bonds to trade across markets,providing guarantees for bonds and improving inventory turnover.This paper argues that LGFV transformation has achieved remarkable results but has not yet been completed.Local Government Financing Vehicles still have a long way to go before they become real market players.