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An Analysis on the Risk and Prevenitve Mechanism of Local Government Bonds in China

Author: XuYuanDong
Tutor: JiangWei
School: Shenyang University
Course: Finance
Keywords: Local government bonds Credit risk Risk measurement KMV model
CLC: F812.5
Type: Master's thesis
Year: 2013
Downloads: 115
Quote: 0
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Abstract


According to Article28of Budget Law of People’s Republic of China, the local budgetsat various levels shall be compiled according to the principles of keeping expenditures withinthe limits of revenues and maintaining a balance between revenues and expenditures, andshall not contain deficit. The local governments may not issue local government bonds, exceptas otherwise prescribed by laws or the State Council. The international financial crisis havetaken severe impact on the domestic economy in2008, the central government launched the4trillion economic stimulus plan. Starting in2009, the central government issued200billionYuan local government bond, which is published by the central government but named for thelocal government, to help local government overcome the financing difficulty. The localgovernment accumulated some experience on debt management though operation of theseyears. In2011, the local government begun to issue bonds by themselves, and the bonds wereissued successfully and widely recognized by the market. This pilot project was regarded asone significant reformation on the way of issuance of local government bonds.The Chinese government has approved consecutively the issue of local governmentbonds for four years from2009to2012. It indicated that the Chinese government does nottake the local government bonds as a temporary measure to save the international financialcrisis, the Chinese government would be committed to develop the market of local bonds inChina and to improve financing capability of local government. With the continuousdevelopment and expansion of this market, the risk will follow. Both the overseas anddomestic research has indicated that a series of risk exists in the local government bonds Onthe basis of previous research, the purpose of is to evaluate the credit risk of local governmentbonds and build preventive mechanisms of it in two aspects of theoretical knowledge andempirical analysis. It appears that this article can provide theoretic support for thedevelopment of local government bonds in China. Firstly, this article introduces the experience of some developed countries, such as theUnited States and Japan, on the aspect of issue and risk prevention of municipal bonds, andmakes comparison with them. Secondly, this paper identifies and analyses the various types ofrisk that existed in the local government bonds. Thirdly, taking Shanghai City and LiaoningProvince for example, the article takes the advantage of revised KMV model to measure thecredit risk of local government bonds in these two areas, then we get the scale of issue andEDF of local government bonds respectively in different deadlines. Finally, we get theconclusion through the research of this article, and provide policy maker with some practicaladvices about risk-prevention mechanism of the local government bonds in China.

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CLC: > Economic > Fiscal, monetary > Finance, the state's financial > China's financial > National bonds, bonds, foreign debt
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