Local Government Debt Governance in China in the Past 70 Years:Review and Prospect

This paper gives an overview of local government debt governance in China in the past 70 years and looks ahead to its strategic prospect in the new era based on a theoretical analysis of debt characteristics in the transition period.For this purpose,we divide the past 70 years into fi ve stages:planned regulation,exploration,wide fl uctuations,pilot expansion,and comprehensive transformation,which is a prudent trade-off process between“incentive”and“control”objectives to deal with the strategic fi nancing game of local governments and striving to make debt governance regulated,transparent,and institutionalized.With the historic changes in social and economic development concepts in the new era,the debt governance mode needs to shift from the conventional GDP-based quantitative governance to performance governance which is oriented towards long-term benefi ts,with a focus on improving the quality and efficiency of debt financing.Guided by the new development concepts,debt governance in the new era can continue to unleash reform dividends and promote strategic adjustments at the institutional,structural,mode,and technical levels in an orderly manner,so as to lay a solid foundation for ensuring the security of fi scal operations and the sustainability of local government debt fi nancing.

Apples, oranges and lemons: public sector debt statistics in the 21st century

In both academic research and policymaking,public sector debt and debt-to-GDP ratios are relied on for a multitude of important economic,political and socioeconomic decisions,especially as public sector balance sheets expand to an unprecedented size in the midst of the 2019–2020 COVID pandemic.The reliance on available data from reputable sources often overlooks the question of whether the denominator in this ratio is accurately measured or how well the denominator is understood by the audience interpreting it.Building on past work in international financial statistics,and making use of a unique and newly created dataset on media reporting of public sector debt,the purpose of this article is to examine the quality,accuracy,interpretation and overall meaningfulness of public sector financial statistics.The main findings suggest that i)most of the world’s governments still do not seem to feel sufficient pressure to voluntarily provide comprehensive financial statistics based on well-defined modern methodological frameworks and ii)high profile financial statistics,which are reported,have become increasingly numerous and complicated,making it difficult for non-experts to know which is most appropriate in the context of their analysis.

The Governance of Local Government Debt from the Perspective of Fiscal and Financial Coordination:Evidence from Financial Markets

Theories based on fiscal guarantees cannot explain either the fact that the continuously decline in local fiscal resources has not significantly increased local government financing costs,or the fact that local government debt has been rising at a time of strict central government regulation.The theoretical and empirical analyses provided in this study show that it is the financial resources under local government control that provide the implicit guarantee for local government debt.Such financial resources lower local governments’financing costs but have the potential to lead to the contagion of financial risk through local government to the financial sector.Therefore,to look at the question solely in terms of either fiscal or financial sector guarantees will not be sufficient to resolve the problem of local government debt.The central government needs to coordinate fiscal and financial policies under a joint management framework in a way that rationally disperses and resolves the risks attached to local government debt and avoids the assumption of excessive risk by either sector.At the same time,close attention should be paid to local financial institutions’asset quality and their money market reputation to avoid the risk of contagion from local financial institutions to local public finance.

Decentralization, Supervision, and Chinese Local Government Debt

Decentralization can alter the incentive structure of local governments and one outcome of this is debt accumulation. Based on the “Province-Managing-County” pilot policy, a fiscal decentralization reform devolving fiscal power from the prefecture-level city to the county level, we assess the impact of fiscal decentralization on local government debt using a difference-in-differences model with a unique county-level dataset from 2011 to 2019. According to the study findings, the “Province-Managing-County” reform resulted in an average increase of 5.758 percent in the local government debt ratio across the pilot counties. Mechanism analyses suggest that this may have arisen from changes in the incentive structure, including external pressures from government assessments and internal developmental needs for promotion, leading to a rise in expenditure pressures on local governments. The role of supervision in mitigating the impact of fiscal decentralization on debt growth was also demonstrated, indicating that an appropriate supervision mechanism must be in place in conjunction with a decentralization policy.

Local Government Debt,Sectoral Linkage and Resource Allocation Efficiency

Increasing the efficiency of resource allocation is the basis and guarantee for boosting high-quality economic development.Based on the panel data of Chinese industrial enterprises and cities from 2008 to 2013,this paper studies the influence of infrastructure construction demand shocks represented by local government debt expansion on the efficiency of sectoral resource allocation from the perspective of sectoral linkage.According to the empirical findings,local government debt significantly reduces the resource allocation efficiency of manufacturing sector that is highly related to infrastructure construction.This conclusion is still tenable after the robustness test using the simulated local government debt as an instrumental variable.Further mechanism tests show that there are two reasons for the decline of the efficiency of resource allocation in manufacturing sector that is highly related to infrastructure construction.First,more product demands and investments brought by the expansion of local government debt flow to less productive enterprises in the sector.Second,resource misallocation reduces the probability of high-productivity enterprises entering the market and low-productivity enterprises exiting the market,and the effect is more prominent in cities with high dependence on state-owned enterprises and high pressure on officials to be promoted.According to this study,the performance management of local government debt should be further strengthened,and particular attention should be paid to the influence of local government debt on enterprise investment and financing crowding out and resource misallocation.

Local Government Debt, Factor Misallocation and Regional Economic Performance in China

This paper examines total factor efficiency and productivity performance by taking into account local government debt （LGD） in 31 Chinese provincial regions for the period 2000-2013. The results show that neglecting LGD may overstate economic performance in Chinese provinces. The eastern region shows better performance in single jactor efficiency and total factor efficiency than the non-eastern regions. The western region shows the worst total factor performance. The north-eastern region is the only region that has experienced a decline in total factor performance. The state-dominated, investment- driven development model may help technological progress across Chinese regions but could lead to significant factor misallocation. We argue that biases towards more state- dominated investment and land supply in less productive western, central and north- eastern regions, at the expense of investment and land supply in more productive eastern regions, have contributed to the recent slowdown in economic growth in China. Therefore, .further market-oriented reforms in factor markets should be considered in the future.

Status analysis and control measures of the debt risk in Chinese local government:based on the study of the relationship among“power,responsibility and interests”

From the view of current condition and developing trend of the debt scale in Chinese local government,if it could not be controlled by an effective way,the debt crisis will explode in the near future.According to the regional distribution in our country,except for Beijing,Shanghai,Tianjin and Hainan,the debt risk mainly concentrates in the western region.In a further step,it can be seen that this risk of debt is resulted by the imbalanced relationship among“power,responsibility and interests”which contains none-accordance of debt power(such as debt financing power),confusion of debt responsibility(such as debt management responsibility)and distortion of debt interests(such as the private benefit and the public interests).If we want to correct this problem,the keynote is to prevent the local government’s debt to be used by the purpose of reaching the private interests.Actually,it should play a role that the local debt financing takes to the“faithful”service for the social interests.For realizing this purpose,it should keep eyes on the relationship among“power,responsibility and interests”,which is the most important factor as for setting up the control system of debt risk about our local governments.Particularly,it includes the following aspects.First of all,it should find the right time to empower the local government with the debt power.Secondly,on the basis of both positive and negative sides,it should design a system to restrict the debt responsibility in the local government,in order to solve the problems such as new debt,invalid debt and overdue debt expansion.Thirdly,it should propose the guidance mechanism to realize the convergence from the private benefit to the social interests on the local debt.

Local Government Debt in China:Development in Seven Decades,Current Situation,and Reform Suggestions

Since 1949,local government debt in China has gone through the stages from scratch,then banned,and reintroduced,and then to the scale expansion,market construction and improvement under the system construction.In the past 70 years,although there have been twists and turns in its development,local government debt has undergone a“perfect transformation”.Based on a comprehensive review of the development of local government debt in China from 1949 to 2019,this paper refi nes its evolution logic,forecasts its development trend,and puts forward relevant policy recommendations for the future management and risk control of local government debt in China.

Credit Spreads,Probability of Default and Debt Risk Measurement of Prefectural Governments in China:2014-2017

In this paper,the concepts of probability of default,loss given default and expected loss in the internal ratings-based approach are introduced into the measurement of local government debt risk.Based on issuing interest rate and credit spreads of provincial government bonds,the default probability models of general debt and special debt are constructed and estimated,and the general and special debt risk of 333 prefectural governments in China from 2014 to 2017 are estimated respectively,and their regional distribution and changes are analyzed.The conclusions are as follows:Both general and special debt risk are different among regions.In terms of vertical changes in 2014-2017,debt risk has increased on the whole,but this increase has been driven more by the increase in the size of the debt,with no significant change in the probability of default,and the debt risk is concentrated in a small number of prefectural governments.The general debt risk accounts for about two-thirds of the total debt risk,the special debt risk accounts for about one-third,and this proportion structure is basically unchanged in 2014-2017.Based on the above conclusions,this paper puts forward corresponding policy recommendations for governance and control of local debt risk.

The 2018 new asset management regulation and LGFV bonds in China

While the local government debts and local government financing vehicle(LGFV)bonds underwent reconstruction,in 2018 the new asset management regulation introduced some tighter measures to restrain shadow banking business and to mitigate the moral hazard issue that led to an ongoing boom of the LGFV market.This paper examines the impacts of the 2018 new asset management regulation on the credit spread of newly issued LGFV bonds and explores how the new asset management regulation affects the implicit guarantee of local governments in the LGFV market that has piled up systemic risks.We find that the release of the new asset management regulation has raised the credit spread of LGFV bonds at issuance.More importantly,the credit spread becomes increasingly sensitive to the local governments’financial capacity and credibility right after the introduction of the new asset management regulation.Therefore,investors are compensated by more risk premiums for holding LGFV bonds issued by the local governments with a weaker balance sheet.Consequently,the implicit guarantee problem in the LGFV bond market has worsened.

农村税费改革后乡级财政的深层次问题——以成都市属县(区、市)若干乡镇为例

农村税费改革对于农村经济发展不同水平地区的财政状况产生了不同影响 ,在欠发达地区 ,乡级财政困境成为推进农村经济发展的障碍 ,乡级财政困境的真相在于自筹制度与农业税的比重 ,取消自筹制度的税费改革使乡镇财政缺口扩大且形成乡镇债务增长 ,并出现乡镇财政危机 ,而消除乡级财政危机根本举措则是撤销乡镇财政。

Policy Innovation Diffusion and PPP Spatial Distribution

Since 2014,PPP policy has been promoted rapidly in China.Based on the theory of policy innovation diffusion,this paper explores the formation mechanism of PPP spatial disequilibrium at the micro level using Chinese municipal-level panel data from 2014 to 2019.According to the research,the innovation diffusion of China’s PPP policy at the local-government level exhibits R-shaped non-progressive characteristics and is influenced by both internal and external factors.On the internal side,the debt pressure of local governments is an important determinant with an inverted U-shaped influence on PPP policy.On the external side,imitation and competition among neighboring local governments are the main external determinants.This spatial strategic interaction occurs not only in same-province regions with close proximity and similar economic development but also in different-province regions with close proximity.The above studies offer certain insights into optimizing the spatial distribution pattern of PPP and guarding against fiscal risks.