Research on the Measurement of the Safe Scale of Bonds in Central China

Abstract

In the context of “the new normal”, the downward pressure on China’s economy has increased, and the gap between fiscal revenue and expenditure has become prominent. Government bonds have become one of the important financing tools for local governments. In the process of issuing bonds, how to determine the bonds’ scale and control risks has become a new problem for governments at all levels. The paper uses the improved KMV model to measure the safe scale of bonds in six provinces in central China, specifically Henan, Hunan, Hubei, Anhui, Shanxi, and Jiangxi province. In order to assess local government’s guaranteed fiscal revenue accurately, the paper adds central-to-local transfer payments to the general public budget revenue, and minus the provincial rigid expenditures and due debts. The empirical results show that the safe scale of bonds in central China is small, and there is no space for issuing new bonds in Hunan, Hubei and Henan province. Based on the results, this paper puts forward some policy suggestions, such as regulation of the scale of local government bonds and establishment of local government debt service reserve system.