Several explorations on how to construct an early warning system for local government debt risk in China.

Xing Li,Cong Chen,Xiangyu Ge,Mehdi Keshavarz-Ghorabaee

doi:10.1371/journal.pone.0263391

Abstract

This paper aims to explore several ways to construct a scientific and comprehensive early warning system (EWS) for local government debt risk in China. In order to achieve this goal, this paper studies the local government debt risk from multiple perspectives, i.e., individual risk, contagion risk, static risk and dynamic risk. Firstly, taking China's 30 provinces over the period of 2010~ 2018 as a sample, this paper establishes early warning indicators for individual risk of local government debt, and uses the network model to establish early warning indicators for contagion risk of local government debt. Then, this paper applies the criteria importance though intercrieria correlation (CRITIC) method and coefficient of variation method to obtain the proxy variable Ⅰ, which combines the above two risks. Secondly, based on the proxy variable Ⅰ, both the Markov-switching autoregressive (MS-AR) model and coefficient of variation method are used to obtain the proxy variable Ⅱ, which comprehensively considers the individual risk, contagion risk, static risk and dynamic risk of local government debt. Finally, machine learning algorithms are adopted to generalize the EWS designed in this paper. The results show that: (1) From different perspectives of local government debt risk, the list of provinces that require early warning is different; (2) The support vector machines can well generalize our EWS.

Highlights

Nowadays, the growing public debt and on-going debt crisis in many countries, such as the US, China, Spain, Italy, Brazil and Mexico, are alarming policymakers and scholars
This paper proposes the following hypothesis: Hypothesis 1: A proxy variable that comprehensively considers the individual risk, contagion risk, static risk and dynamic risk of local government debt of each province can be obtained by network model and Markov-switching autoregressive (MS-AR) model
Through the selection of early warning indicators for individual risk and contagion risk of local government debt, the proxy variable I which combines the two risks are obtained by the criteria importance though intercrieria correlation (CRITIC) method and coefficient of variation method for each province

Summary

Introduction

The growing public debt and on-going debt crisis in many countries, such as the US, China, Spain, Italy, Brazil and Mexico, are alarming policymakers and scholars. Among the highly indebted countries, China is gaining particular attention This is because since China granted local governments the right to issue bonds in 2009, the balance of local government debt in China has surprisingly increased by 200% in a short decade, i.e., from 10717.491 billion yuan in 2010 to 21330 billion yuan in 2019 (China’s National Bureau of Statistics and National Audit Office). Such a rapid growth has spurred an academic debate on how to strengthen the supervision of public debt and how to avoid the outbreak of debt crisis.

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