Research On Credit Risk Measurement Of Chinese Local Government Bonds

After the outbreak of the financial crisis in 2008,in response to the crisis,the government of China introduced ten measures to further expand domestic demand and promote steady and rapid economic growth.It was also called the “4 trillion investment plan”.Because the plan was mostly for people's livelihood projects,infrastructure,and ecological environment construction,it was necessary for the local government to invest a large amount of financial funds.Coupled with the acceleration of the urbanization process in recent years,the financial pressure faced by local governments has also intensified.In the case of a huge gap in local financial funds,local governments have adopted a variety of disguised debts and illegal borrowing to raise funds.As a result,the scale of local government debt has been deviated from control,and the form of debt has become more invisible,creating a greater risk.The newly revised Budget Law in 2015 allowed local governments to issue bonds within the prescribed limits.Since then,relevant policies and regulations have been introduced to regulate the operation and management of local government bonds,but a reasonable and effective government bond credit risk assessment system has not yet been formed.The scale of issuance of local government bonds has expanded rapidly,and the potential credit risk that comes with it cannot be underestimated.How to scientifically measure the scale of security issuance of local government bonds and credit risk has become the focus of research.In this background,this paper conducted empirical research on the credit risk of local government bonds from qualitative analysis of bond issuance history,current situation,credit risk sources,etc.An empirical study was carried out using the improved KMV model.The credit risk of local government bonds of 15 representative provinces(cities)in the eastern,central and western regions was quantitatively analyzed and the probability of default of local government bonds and the safe scale of bond issuance were measured.There are three main findings: First,it is estimated that except for the default probability values of Guangdong,Shanghai and Beijing in 2019 and 2020,which are close to zero,other provinces(municipalities)are close to 1,and the risk of default is very high,which should be highly concerned;Then,in terms of the safe amount of debt,generally speaking,the local government with large financial resources can also pay a larger scale for its debt.Finally,the proportion of debt in the guaranteed fiscal revenue is between 80% and 90%.And the proportion tends to decrease from east to west in the eastern,central and western regions.This paper has four main conclusions: First,according to the revised KMV model,the issuance of local government bonds is collateralized by the guaranteeable fiscal revenue of local government,and 15 provincial(municipal)local governments should determine the scale of bond issuance with fully taking account of the fiscal revenue and the debt paying ability in the future,and cannot blindly issue bonds to accelerate the economic development and urban construction of the region,in case of causing credit risk;Second,under the lognormal distribution,the probability of default of local governments in 15 provinces(municipalities)will increase with the expansion of bond issuance.Therefore,local governments should conduct dynamic monitoring and risk warning on bond issuance when issuing bonds,and carry out scientific research on projects before project construction.What's more local government should strictly control the scale of bond issuance according to the actual situation of the government's comprehensive financial resources and rigid fiscal expenditure,and ensure that government bond funds are used for capital public goods;Third,in the determination of credit rating and expected default probability of local government bonds and their corresponding relationship,it is necessary to learn from the experience of international authorities,and it is inseparable from perfect evaluation institutions,mature rating techniques,and rating agencies that can perform their duties objectively and fairly.And the transparent and true rating datas and historical datas on defaults of rating objects are also necessary.Fourth,in the same safe line of default probability,the scale of debt and the volatility of guaranty fiscal revenue are inversely proportional,that is,the bigger the volatility of local fiscal revenue is,the smaller the safe scale of bond issuance is,and the greater the proportion of safe scale of local government bond in guaranty fiscal revenue and total fiscal revenue is.It is concluded that the eastern region's government has the strongest debt-bearing capacity,followed by the central region and the west is the weakest.