Quickening The Reform Of Fiscal And Taxation System And Defusing Local Debt Risks

By the end of June 2013, the total debt of the central and local governments amounted to 30 trillion and 270 billion yuan, of which the total amount of local government debt was less than 18 trillion yuan (17 trillion and 890 billion yuan), and the total amount of central government debt was 12 trillion and 380 billion yuan.

The ratio of total government debt to GDP is 53.5%.

Deep reasons for local debt expansion

First, the growth of local government debt is too fast.

Financing platform is the main source of local government debt.

On the one hand, the financing platform does not enjoy the government credit discount, and its financing cost is even higher. On the other hand, the financing platform is divided into government and business, corporate governance is backward, capital capital is increased, asset liability ratio is high and debt paying ability is weak, which will increase the risk of government debt.

Secondly, local debt structure is concentrated on low-level governments.

From the total debt and debt liabilities that are directly responsible for debt repayment, the city and county level accounts for about 70%, while the provincial level accounts for only about 30%. This is because the government with relatively low financial revenue and relatively backward economic development has more power to develop the economy through borrowing.

However, for some cities and counties, the local economic foundation is weak, the level of industrialization and urbanization is not high, and the potential of land development is not strong, so its financial funds may be difficult to repay principal and interest, and it is more likely to become the trigger point of local debt risk.

Thirdly, local debt is concentrated in medium and long term assets and faces liquidity risk.

From the point of view of local debt investment, it is mainly used for long-term projects such as municipal pportation and pportation.

On the one hand, during the four trillion period, the local leading medium and long-term investment projects may fail to review the future repayment ability of the project.

On the other hand, the time limit for investment to be put into operation may be longer than the debt repayment period. The local government may have greater debt paying pressure before the investment project has been put into operation.

The two may lead to the peak of debt repayment. The local government's capital chain is facing liquidity risk.

Finally, the source of the indebtedness of the government's indebtedness is increasingly concealed.

In 2010, the CBRC restricted the credit of banks to invest in local financing platforms, and local governments began to turn their liabilities to the grey area, the shadow banking.

These debts are very covert, and the risk is not easy to control and the financing cost is higher than the interest rate in the bank.

With the expiration of trust and financial products and the strengthening of supervision on shadow banking, local debt may be more prone to the risk of capital chain breakage.

The total amount of local government debt is controllable, but the potential risks have to be prevented.

Find the deep-seated reasons for the expansion of the local government debt, suit the remedy to the case, cure the symptoms and cure the root, and solve the local government's debt problem systematically.

First of all, fiscal decentralization does not lead to expansion of local debt.

After the tax sharing system, the local fiscal revenue decreased and the financial expenditure was rigid. Social security, the cost of local government departments and institutions, and the development of supporting infrastructure for local development all depended on local fiscal expenditure.

The imbalance of fiscal power and financial power leads to the worsening of local fiscal revenue and expenditure. The central pfer payment is also difficult to fully cover the financial gap. It is not surprising that the government seeks new sources of capital through borrowing.

Secondly,

The reform of fiscal decentralization does not completely enlarge the risk of local debt.

The local government can not make up for the financial gap through the formal channel financing. It can only rely on the financing platform, on the one hand, leads to high financing costs. On the other hand, debt is not included in budgetary management and can not be supervised.

In addition, the reform of fiscal decentralization is not thorough. The tax sharing system below the provincial level has not been effectively promoted, and the burden of fiscal expenditure has been under pressure.

Thirdly, local governments are facing soft budget constraints.

First of all, under the pressure of economic downfall, the central government can not take hard constraints on local governments and acquiesce in local debt investment expansion.

Secondly, local debt is characterized by great and overwhelming character.

If the risk of local government debt is exposed, the central authorities can not really ignore it because of the consideration of employment and holding the bottom line of systemic financial risk.

Finally, the place provides explicit implicit guarantee for the platform company. The bank reduces the risk management of the platform company, causing financial institutions to soften the local debt constraint.

To defuse local debt risks, we should combine them with both sides.

"Thinning" is not enough to give up the bottom line thinking. There is much room for urbanization, industrial upgrading and infrastructure improvement in China. The central government needs to rely on local governments to borrow money to meet the financial gap.

"Blocking" is to prevent financial risks, plug up hidden debt sources, and let local governments borrow sunlight.

Palliative measures are classified to deal with the risk of stock debt and prevent the outbreak of systemic financial risks.

The permanent cure is to establish a standardized local government debt financing mechanism and fundamentally solve the local government debt risk.

We should speed up the reform of fiscal and taxation systems and emphasize the equivalence of powers and responsibilities.

On the one hand, the central government has a leverage ratio of only 25%. The central government should take advantage of low leverage and gain some responsibilities and expenditure responsibilities.

On the other hand, the central government should increase the proportion of local governments sharing the tax, expand the tax source of local governments, and levy property tax and inheritance tax at the right time.

In view of the soft budget constraint of local governments, the central authorities should strengthen accountability mechanisms and desalination awareness.

On the one hand, the central government should clearly stipulate that government liabilities should be regarded as an important indicator of performance appraisal, and strengthen the assessment, audit and accountability of the debt situation during the term of office; on the other hand, we should weaken the sense that the central government will rescue the risk of local government debt exposure. If the superiors clearly do not help, the local government will solve the debt problem on its own, so that the local governments will be more cautious when borrowing money, and the use of debt funds will also be more "saving".

In view of the problem of official assessment mechanism, we should speed up the change of local government functions and reform the promotion and assessment mechanism based on "GDP only" theory.

We can promote the pformation of the local government from service-oriented to service-oriented through the incentive mechanism that includes the debt, resources, environmental protection and livelihood of the people.

In view of the government's investment system, local governments can actively introduce social capital, break through the monopoly of some public utilities, allow private capital to participate in the form of equity participation, invest in infrastructure, give private capital pricing autonomy, and give policy support in land and finance, so as to enhance the attractiveness of infrastructure projects to private capital.

All of these are the radical solutions to the risk of medium and long-term debt, but considering several rounds of steady growth measures since the financial crisis, local debt expansion has been too fast, and accumulated bad assets which can not cover principal and interest.

In response, the government should classify the stock debt and replace public interest projects through medium and long term bond issuance. Non public interest projects that can not really improve profits should be disposed of as soon as possible so as to prevent systemic financial risks.

First of all, the government can through credit asset securitization and the establishment of local Asset Management Co. Banks can discount some of the bad loans through asset securitization.

Although banks bear certain losses, they enhance the liquidity of bank assets and greatly reduce the risk of banks.

Secondly, the loan is extended and issued for a long time.

If the local government fails to repay the debt after the maturity of the debt, the government can replace the stock debt by issuing a long-term financing facility and postpone the debt maturity of the local government.

Finally, local governments can sell local state assets and land, and directly repay local government debts.

In order to avoid systemic financial risks, the central government can make use of its low leverage advantage to disclose the local government debt by issuing special treasury bonds, but it must clarify the responsibilities of the responsible person and take punishment measures to prevent the moral hazard under the expectation of unlimited central rescue.

Generally speaking, most of the above plans are the last resort.

The way to solve the risk of local government debt is to speed up the reform of fiscal and taxation systems, to balance the fiscal power among governments, pform the functions of the government, pform the building government into a service-oriented government, and enhance the budgetary constraints of local government debt.