Analysis of fiscal decentralization

[Abstract] China's fiscal decentralization reform has conducted a number of current, the demand for reform is a political power, financial power, however, the regime seems to correspond with the financial power is still a long way to go in place a large invisible Under the pressure of debt, the financial crisis demanded the expansion of investment opportunities, our country should approve local government bonds, the pros and cons are for? This paper will analyze these issues.

[Keywords:] local government bonds a fiscal decentralization, fiscal decentralization and local governments to issue bonds 1 fiscal decentralization. Fiscal decentralization is the development of the financial management system requirements, the provisions of the central government and local governments and lower local governments financial management responsibilities, permissions, and the division of funds where I used the traditional theory of fiscal decentralization, which from an economic point of view, consider how the government functions in different government-level meeting between the rational and appropriate allocation of financial tools to the problem. the problem of fiscal decentralization aims to coordinate the process to find a good central government and local government revenue distribution relations between the effective ways and methods.

Why the need for fiscal decentralization? This is the multilevel nature of public goods, the requirements of the decision of the modern state's increasingly complex social and economic life, the activities of a single central government unable to meet the social and economic development needs, which requires under the premise of safeguarding national unity to give local governments a certain degree of authority, to enable them to carry out their activities due to changing circumstances due to the exercise of power need to have some money as a guarantee, so the vast majority of countries in order to establish the legal or institutional form fiscal decentralization system.

Since reform and opening, China's financial system for a number of adjustments and reforms, and has made some progress and positive results, the initial formation of the market at the present stage of economic development in line with the requirements of fiscal decentralization system. However, the existing fiscal decentralization system, there are still many deficiencies, needs improvement.

(2) local government bonds. Where is the local government bond recurrent financial balance in the absence of sufficient, to meet local economic and social welfare needs of the development, in accordance with relevant provisions of the law of a bond issued to the society it is raise local funds for construction of local government as a means, but also bonds an important part of the system.

Fiscal decentralization theory emphasizes the local government in resource allocation to compensate for market deficiencies, improve the efficiency of the region's role in resource allocation, but if the division of powers, does not correspond with the division of powers, will lead to local government powers necessary to ensure that no financial authority.

Since 1981, our debt recovery has been no recovery where the bond issue. China's current debt issuance of the regulations, such as the 1993 <<State Council on resolutely stop the collection of funds and strengthen the bond issuance, 'which the Chinese people 1998 Bank issued <<rectify arbitrary collection of funds approved the establishment of financial institutions and financial services implementation plan to do random>> and other laws and regulations are clear regulations: Local people's governments shall not issue or local government bonds issued in disguise.

China's fiscal decentralization reform has been implemented many times, also made a great effect, from the perspective of macroeconomic stability, fiscal decentralization reform, our next step should be the key is whether to allow local governments to issue bonds.

Second, the history of our local conditions of China's bond issuance of local bonds that are issued in a very long period of time are the focus of experts and scholars to discuss, from China's economic development and fiscal decentralization system development, economic experts agree that The issuance of local bonds we already have some basic conditions, including the following:
First introduced in 1994, our tax sharing system, grading the initial establishment of the financial system, has enabled local governments to have a relatively well-defined power and financial power, which means that local governments can issue bonds as economic agents, local government borrowing institutional infrastructure has been established.

Secondly, the existence of local government funding needs of local bonds due to China's planned economy period, almost all of the limited funds are used in building up a production company, resulting in road transport, urban and rural power grid, residential and other construction cycle is long, slow and effective low-profit products and other public infrastructure lags behind the supply of long-term economic and social development needs, although in recent years to implement the proactive fiscal policy, but not yet out of its bottleneck.

Third, the existence of social capital in the debt capacity of local bonds should With the reform and opening up, China's sustained economic growth, social capital and idle income residents has greatly improved, but very limited investment channels from international experience point of view, the local government savings bonds are residents of a better investment choices.

Fourth, some of China's local governments have a certain bearing debt capacity, especially for some of the rapid economic development of the city or region, its ability to doubt bearing debt.

Third, the current opportunity for our local bonds issued 1 local government deficit and debt problems seriously the State Council Development Research Center, where the debt levels of local debt of our research group conducted a preliminary rough statistics, to present at least in our local government debt 1 trillion, of which, local grass-roots government (township government) Total liabilities billion yuan in 2200, the township average liabilities 400 million. This set of data to fully explain, the existence of local government finance has been tremendous pressure.

(2) the local government made up 1.8 billion investment program since the State Department released four trillion yuan stimulus package, the local government investment enthusiasm. Up to now, has announced investment plans according to the 24 provinces cost-effective, total investment plans have been close to 18 trillion, but under the huge debt, I think local government can not afford their proposed investment plans, otherwise, Local governments will face even greater deficit crisis.

Bond issuance can be solved to some extent parts of the financial difficulties of local government is bound to be beneficial, but, from a national perspective, is more good than harm? We'll try to be analyzed.

Fourth, the pros and cons of local bond issues <<Budget Act>> Although the provisions of the legal bonds of local governments stuck gate, but did not block the pace of local government debt in disguise.

1 where the benefit at issue bonds with the central government through the issuance of bonds to raise funds to provide 'local public goods,' compared to local government, 'local public goods' needs to understand and grasp of the information on the comparative advantage, so from the promotion of local public goods provision and local economic development, the local governments to issue bonds has its positive place.

To address the current financial crisis our government financing difficulties, to allow local governments to issue bonds is theoretically feasible, and the development of China's market economy has a positive role.

(1) is conducive to deepening the financial system, improve the tax system, to achieve unity of powers and financial authority In 1994 the tax system reform, China has initially established a central and local tax classification of the financial system from financial structure, China's level property rights and a say in the government level, but because <<Budget Act>> constraints, the local government does not have made claims, which is not given enough financial power of local government, therefore, to some extent, the local government in fact did not form a complete system of local finance, which also resulted in many problems, most notably in the central and local financial authority, the irrational distribution of powers. After the implementation of revenue-sharing, the central fiscal revenue in 68% of the revenue of local government revenue accounted for only 32%, but the local government spending accounted for 60% of central government expenditures accounted for only about 30%, according to public finance theory, if the empowerment of local governmental organizations to provide local public goods production and the powers, should also be given to the corresponding complete financial authority, and give credit under the tax system is to regulate the property rights at all levels of government should have one in this sense, to allow local governments issuing local government bonds is to further deepen financial reform, the local financial authority and powers to solve an important measure of asymmetric (2) help to regulate the behavior of existing local government borrowing, the dominance of the implicit debt of local government, local government to effectively resolve debt risk, ease local financial predicament.

Although China's current law does not allow local government borrowing, but in fact, a long time, local governments have to varying degrees, directly or indirectly, overtly or covertly huge debt, according to rough estimates of the State Council Development Research Center, the local government debt, at least in 1 trillion, but the vast majority belong to the hidden debt, debt owed by the Government only a township as much as 220 billion yuan. the important reasons for this situation is that the above-mentioned financial authority and powers of local government does not match .

Therefore, in the presence of debt financing needed in the case, a complete ban on local government borrowing behavior will only lead to local government revenue from non-normal channels, to cover the necessary expenses, so rather than let this part of their control of the 'outside the system income 'expansion, it is better to allow local governments to issue bonds for local governments to regulate the form of debt to obtain funds, and increase supervision, improve the local financial system, local government debt to achieve open, market-oriented, and thus completely change the mix of local financial situation.

(3) help to speed up local infrastructure and economic development to urbanization, for example, accelerated urbanization in China in the period of development, urban infrastructure is lagging behind the pressing issues facing our city, according to the State Council Development Research Center, China The level of urbanization will be 36.22% in 2000 to about 60% by 2020, urbanization increased by 1 percentage point per year, would need to invest 1.26 trillion yuan new, urban infrastructure funds is the main source of construction funds. The issuance of local government bonds to satisfy the needs of local government funds for construction, so as to finance local infrastructure construction, promote the urbanization process and economic development.

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It is clear from local governments to issue bonds for social development has a huge role in promoting this positive role in the Western countries have fully emerged. However, different economic systems of China and Western countries through local governments to issue bonds to achieve such an ideal effect? ??I'm afraid not.

2, the constraints of local government bonds and defects present our implementation of local institutional conditions withhold debt maturity, which allows local governments to issue bonds may have the following negative effects.

(1) government 'made claims' may be abused in our country, local people's congresses carry out supervision of local government functions, but in practice, the function of play is limited. As our credit evaluation system is far from perfect, local government and local people's congresses in the state of asymmetric information, limited local people's congress and government supervision of local residents and constraints.

This will make the market a moral hazard: the central government as principal and not as an agent of the local government to form a binding contractual relationship, the local government will tend to over-indebtedness, competing bonds, which will encourage local governments expansion of debt (2) may weaken the central government's control of social resources.

Currently, the implementation of the institutional environment where debt is not perfect, the blind implementation of local debt may result in a competitive local and central contention of resources due to the local government more control of local information, will take full advantage of information superiority and effectively with 'hair claims 'the issuance of local bonds attractive, it is very possible overheating of local bonds, treasury bonds influence the situation, thus weakening the central government macro-control ability. (3) may aggravate the imbalance between regions.

Implementation of local debt, not only economically developed areas 'should be debt resources' rich, but also less developed regions to attract capital flows to developed areas through the purchase of bonds. Most of the flow of resources in developed areas, exacerbate the existing imbalance between regions and a 'horse too much effect. '
(4) encourage local governments to blind investment behavior. Our strong local government's willingness to invest, in order to pursue the current performance, not hesitate to use all available resources, but with little regard for the efficiency of investment and future solvency. In such a interests of the drive, if you open the door to liability, the result might have contributed to the local government's blind investment behavior.

(5) to increase the debt risk public opinion is generally believed that once the local government debt crisis, the Central Government will come forward to rescue, in the end, all the liabilities will be transferred to the central government, far beyond the control of the central government's budget if the allow local governments to issue bonds, the debt will further increase the risk the central, or even result in inflation risks.

Fifth, China's actual conditions and conclusions of this paper issue local bonds advantages and disadvantages, and only have a scientific system can be disadvantages to a minimum range; the contrary, more harm than good, even out of control, debt may become a 'public disaster . 'caution must be taken to issue local bonds to promote the steady and positive attitude.

From an international point of view, the local bond system, although in many countries have played a positive role, but excessive issuance of local bonds caused by the local government and even the central government's debt crisis also exist.

China's current situation, where short-term debt issuance may not be feasible.
First, China's investment and financing system in the main body of the government's responsibility as an investment mechanism is not perfect. China has yet to establish an effective system of government responsibility for financial risk, caused by the current government debt can easily go to the next government, and leading the next government they do not have to bear the mistakes of the previous government leadership and political responsibility, which is bound to allow local governments the wrong use or waste of money.

Second, local government credit problems now, many people only see the existence of local government funding needs of local bonds, however, they did not see for a long time in many parts of infrastructure is in these various means in order to disguise debt, but not in time to repay investors in bad faith or even cause a serious loss of popular support issues.

Third, the problem is the rule of law is not perfect. Issuance of local bonds means that the debt held down, in this regard to enhance the autonomy of local government, on the other hand, if managed properly, strict control, not only will deepen the financial risk , also provide opportunities for corruption in some local officials, so a scientific system, especially the legal system must go in front.

According to popular opinion, the issuance of local bonds must have five conditions: standard fiscal decentralization, a high degree of local self-government, a sound legal system, a sound bond market and a strong local fiscal capacity. Analysis of the status quo, although already analyzed China already has some of the conditions of issuance of local bonds, but these conditions are not sufficient to meet the issuance of local bonds mature prerequisite, will give local governments as well as a huge national finance difficult to eliminate short-term negative impact.

But in the long run, as the local government is increasingly becoming an independent financial body and the conditions for the development of our local bonds mature, actively explore the establishment of local bond system, is necessary and desirable.

In summary, the reality of the system under construction is imperfect, the short term should not allow local governments to issue bonds, but with the main responsibility of local government investment mechanism and improve the rule of law, transparency in decision-making mechanism in the community and local government investors in the establishment of credit, local bonds can also be desirable as a financial tool for local public facilities such as the supply of public goods.


[1] Liu Shangxi: 'Financial Risk and Prevention Study Series>> Economic Science Press, 2000 [2] Wang Shaoguang: <<decentralized bottom line>> China Planning Press, 1997.

[3] Mei Xinyu: <<local government bonds, while desirable, subject to the control>>

[4] Yang Ping: <<foreign local government bond market development experience >>.<< Economic and Social Systems>> 2004 1. Economic and social system than [5] Wei-Hua Wang: <<issuing local government bonds constraints and countermeasures >>.<< financial and economic>> Issue 3 2005

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