Local Government Debt, Financing Platform and Fiscal Risk

Wang Ying,Pan Wenjie

doi:10.5539/ibr.v12n3p40

Abstract

The excessive expansion of local financing platform as a substantive medium for local government borrowing has aggravated local government financial risks, which may induce systemic financial risks. Based on the current debt situation of the central and provincial governments, this paper uses different measurement models to calculate debt balance and default risks of the financing platforms. The results show that nearly one-third of the provinces may have potential financial risks, therefore the central government and local governments should work together and keep four kinds of balances in order to prevent and defuse risks.

Highlights

Large-scale public debt threatens fiscal sustainability (Ghosh et al, 2013), and affects financial stability (Cafiso, 2012) and is not conducive to long-term economic growth (Reinhart & Gogoff, 2011)
The reason for limited empirical researches is that local government debt under the current system is still a sensitive issue and difficult to define in laws and regulations (Gong et al, 2011)
Based on the findings of the above-mentioned literatures, this paper firstly describes the overall situation of local government debt in China, estimates the debt size of China's local financing platform with the help of gray forecasting model and evaluates the fiscal risk of provincial financing platform through KMV model

Summary

Introduction

Large-scale public debt threatens fiscal sustainability (Ghosh et al, 2013), and affects financial stability (Cafiso, 2012) and is not conducive to long-term economic growth (Reinhart & Gogoff, 2011). The deeper reason is local government investment impulse under GDP-based performance evaluation model. The measurement and calculation by Shi (2010) shows that the debt of local financing platform was 11.42471 trillion Yuan by the end of 2009. The reason for limited empirical researches is that local government debt under the current system is still a sensitive issue and difficult to define in laws and regulations (Gong et al, 2011). Based on the findings of the above-mentioned literatures, this paper firstly describes the overall situation of local government debt in China, estimates the debt size of China's local financing platform with the help of gray forecasting model and evaluates the fiscal risk of provincial financing platform through KMV model. The paper puts forward the policy recommendations to prevent and defuse risks

Basic Situation of Local Government Debt Balance

Size Calculation of Local Financing Platform Debt

Risk Assessment of Provincial-level Local Financing Platforms

7.80 Guizhou

Findings

Basic Conclusion