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The Study on the Risk and Control of Local Government Debt in China

Author: TianChengLi
Tutor: ChenLai
School: Anhui University
Course: Finance
Keywords: governmental debt risk assessment PCA risk control
CLC: F812.5
Type: Master's thesis
Year: 2014
Downloads: 2
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Abstract

The debt problem of the local governments in our country is both a research hot spot and a difficult point in the current political circles and educational circles. It is greatly risky to accumulate the local government debts. For instance, the huge debts in the United State result in great damage. Therefore, every country focuses on such research as debt problem, hoping that some effective measuring methods and control mechanism overcoming the debt risk can be put forward. local government debt is a problem which is difficult to be explored thoroughly. On one hand, due to the different regulations and economic conditions in each country, the examples of success in other countries do not apply to one’s own country. On the other hand, the economic system is so complicated and huge that it is difficult to do comprehensive and effective surveys and researches. As an old saying goes,"a journey of one thousand miles begins with one step". Although it is difficult, based on the data and the current domestic indicators of debt risk that is commonly acknowledged, the thesis adjusts and establish new indicators of debt risk to do empirical analysis of the local government debt, putting forward some findings. As for the finance, the establishment of fiscal decentralization theory is a breakthrough of fiscal theory. Guided by the theory, the government in every country raises a loan of varying amount to develop economy. In theory, appropriate debt stimulates the economic development. However, due to different conditions, environment and policies in each country, debt crisis has appeared in many countries and some areas, such as the debt crisis in Greece.Since the reform of the system of the tax distribution in1994, the majority of the tax revenue has been taken in by the central government, while the local government revenue has declined. In order to meet the need of local economic development, the local governments have to depend on borrowing debts, which results in the accumulation of local government debt. Since the financial crisis in2008, China has implemented active fiscal policies to ensure the fast economic development and improve the employment, which results in great financial pressure to the local governments. There exists an imbalance between the income and the expenditure of local government as well as the poor local infrastructure, so the local governments have to boost the economic development by borrowing debts, which to a large degree increases the amount of the debts loaned by the local governments. While China covers a vast territory with different environment, history and customs, the economic development is also imbalanced. Due to the special economic, political and cultural environment, the local government debt of our country takes on different features compared with other developed and emerging countries. Thus, we can not copy the economic policies and development patterns in the western countries or other areas. Instead, we should take the actual economic situations of local governments into consideration to study the problem on debt risk. Firstly, the thesis defines the local government debt, further clarifying the current situation of the local government debt in our country. According to the statistics of the financial department, the total amount of local government debt in our country is14,000billion. In addition, the thesis analyzes the reasons causing the local government debt, mainly taking the macroeconomic policy, the financial system and the management system into consideration. The panel data of the governments’ direct as well as the implicit pension debts in the cities like Changsha, Guiyang, Shenyang, Hefei, Nanchang and Lanzhou from2010to2012has been collected. All the data is analyzed with PCA in the SPSS to obtain the conclusions. The author believes that the local governments have to control the increment. If there is a need to increase the debt, local governments have to consider the rate of the economic development and the increment of income that year. Besides, as for the expenditure, the amount of the debt to be paid by the expenditure has to be less than or equal the economic benefits that can be generated by the expenditure. Lastly,proposals and suggestions are given in the thesis for the local government debt:the administrative power and financial power of the local government as well as the boundary between the governments and the market has to be clear and definite; the construction of the financial resources of the local governments has to be further enhanced; and the effective institutional system and management mechanism of debt repayment should be established, increasing the transparency of local debt.

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