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SHANGHAI JIAO TONG UNIVERSITY

THESIS OF BACHELOR

5091209177

():

THE RESEARCH ON CHINAS LOCAL GOVERNMENT


FINANCING CURRENT STATUS AND FINANCING
METHODS
ABSTRACT
With the continued acceleration of modernization in China, fiscal problems of local
government become increasingly prominent. Various topics have become widely discussed, such
as how to raise enough money and how to control the risks of local government debt. Based on the
existing research and relevant theory, embarking from the public goods theory and the benefit
principle, the paper analyzes the necessity of local government financing. And then compared to
advanced experience of other countries, the article points out the significant progress of Brazil's
government in fiscal system reform, the management of the local government debt and the
construction of information transparency. The revelation of Indian governments perfect system of
transfer payments is also inspiring. After statistical analysis of the present situation and problems
of local government financing platform in China, this paper discusses the classification of the
local government financing methods and put forward innovative financing channels, taking
Shanghai as an example for case study. Finally the paper points out the main problems of local
government in China and come up with feasible suggestions: focusing on regional financial
difference, promoting the marketization of government financing and standardization, and actively
introducing private capital to public projects to establish a diversified financing system of local
government.
Key words: local government financing, financing platform, financing methods



.................................................................................................................................... 1
1.1 ............................................................................................................... 1
1.2 ........................................................................................................................... 2
1.3 ............................................................................................... 4
1.3.1 ...................................................... 4
1.3.2 ................................................................. 5
1.4 ............................................................................................................... 6
................................................................................. 7
2.1 ................................................................................................... 7
2.1.1 ........................................................................ 7
2.1.2 ........................................................................................ 8
2.1.3 ........................................................................ 8
2.2 ................................................................................................... 9
2.2.1 ........................................................................................ 9
2.2.2 ...................................................................................................... 10
2.3 ......................................................................................................................... 10
................................................................................................ 11
3.1 ..................................................... 11
3.1.1 .................................................................................. 11
3.1.2 ...................................................................................... 12
3.1.3 .......................................................................... 14
3.2 ............................................................................................. 15
3.2.1 .................................................................. 15
3.2.2 .............................................. 18
3.2.3 .............................................................. 20
3.3 ......................................................................................................................... 21
.......................................................................................... 22
4.1 ..................................................................................................................... 22
4.1.1 .............................................................................................................. 22
4.1.2 .............................................................................................................. 24
4.2 ..................................................................................................................... 25
4.2.1 .............................................................................................................. 25
4.2.2 .............................................................................................................. 25
4.3 ..................................................................................................................... 26
4.4 ................................................................................................................. 26
4.4.1 .......................................................................................... 26
4.4.2 .............................................................................................. 27
4.5 ..................................................................................................................... 29

4.5.1 ...................................................................................................... 29
4.5.2 .............................................................................. 29
4.5.3 .......................................................................................... 30
4.6 ......................................................................................................................... 31
.................................................................... 32
5.1 ................................................................. 32
5.2 ............................................................. 32
5.3 ..................................................... 32
5.4 ......................................... 33
.................................................................................................................................. 34
....................................................................................................................................... 36
............................................................................................................................................... 37


1.1
2011

1 37

1.2

2009


2011

2010

2008
2010



2011



2010
1
23
BOT ABS 456
2010

2009
:

2009
2 37


2009

2009

2009 2000



2011


2010


2010

2012


2010


3 37

2011


2012


2010-

1.3
1.3.1

--
4 37

1.3.2


1
2 3

5 37

1.4

6 37

2.1
2.1.1
20 80



20 60 20 80

80

190

230



1994
80%-90%

220

1998

1997 2004 GDP


5%

7 37

2.1.2

ARO


Federal
Housing and Saving BankFederal Economic and Social
Development Bank

2.1.3
1

8 37

2.2


1991

2.2.1
1

1995-1996

16

4005.71

1997-1998

12

771.15

1998-1999

12

258.76

1999-2000

5289.68



1999-2000

10



35% 57%



9 37

1995-1996 182 GDP 1.3%

2.2.2
20 90 2005
2005


2008 25

GDP 30% GDP 2.93% 2.19%

2.3



10 37

3.1
3.1.1
GDP

2 GDP
66.3
79.9
92.4
82.9
84
84.6

116.7
124.9
44
92.8
0

50

100

198.4
150

200


2010 6.75
10.7 17.5 GDP 44% 2010 GDP
40.1 GDP
OECD GDP




3



99%

11 37

3.1.2

1994 1994
78% 44% 18
1993 4349 2011 103874 22.88
1993 958 2011 51327 52.58
3391 52547 14.5

120,000

80,000

40,000

0
1990

1993

1996

1999

2002

2005

2008

2011

80%

70%
60%

50%

40%
30%
20%
1990

1993

1996

1999

2002

2005

2008

2011


2


12 37

1994
1990 2000
70% 2000 2011 84.88%

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

1990

1993

1996

1999

2002

2005

2008

2011


3

1994
2011
109248 16514 92734
84.88%
50.59%

45000
40000

35000
30000
25000
20000
15000
10000
5000
0
-5000 1990

1993

1996

1999

2002

2005

2008

2011


4

13 37

2011
8000

100%
80%

6000

60%

4000

40%

2000

20%

3.1.3
1994
3
12 1994 55%
70%

4 2011

51327.32

52547.11

49%

51%

48631.65

41106.74

54%

46%

18277.38

5989.25

75%

25%

174.56

13504.44

1%

99%

10023.35

6746.29

60%

40%

3633.07

2421.04

60%

40%

169.37

2609.92

6%

94%

425.28

616.94

41%

59%

425.28

13.17

97%

3%

14 37

0%

2.99

1.16

72%

28%

2695.67

11440.37

19%

81%

361.40

2695.01

12%

88%

404.02

3635.36

10%

90%

38.76

1262.63

3%

97%

1891.49

3847.37

33%

67%

6936.21

100%

0%

13560.42

100%

0%

-9204.75

100%

0%

29.76

100%

0%

2044.89

100%

0%

2559.12

100%

0%

595.87

0%

100%

1102.39

0%

100%

1222.26

0%

100%

2062.61

0%

100%

302.00

0%

100%

1075.46

0%

100%

2765.73

0%

100%

91.38

0%

100%

3.2

3.2.1
6 1997 2010
1998 2009 30%
15 37

30% 1998 2009

2010
18.86%

70

61.92

60

48.2

50

33.32

40
30

26.52

24.82

23.48

18.86

20
10
0
1997

1998

1999-2002 2003-2007

2008

2009

2010

6


2010 107174.91
67109.51 63%
23369.74 22%
16695.66 15%

22%

15%

63%


7




16 37


46632.06 43%
32111.94 28430.91 30% 27%

27%

30%

43%


8
11 /
53208.39 8 / 23716.35 23%12
/ 29250.17 27%

23%

27%

50%


9


84679.99 79% 4477.93
4% 7567.31 7% 10449.68
10%

17 37

10%

4%

7%

79%


10

3.2.2



55
50

45
40
35
30
25
20
1990

1995

2000

2005

2010

11

2011 50%
51.3% S 60%

18 37

GDP
20
18
16
14
12
10
8
6
4
2
0

18
12.4 12.6
10.3 10.2

13.4

14.3

18.2

13.3 13.5

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

12 GDP
GDP
3%-5% GDP 2010 18.2%
GDP 7%
2015 100 000



5

1995

5.4

16.8

11.2

56.9

9.7

2000

14.5

29.0

5.3

41.4

9.7

2003

11.0

33.2

0.5

2.7

46.7

6.4

2004

10.3

31.4

0.2

2.4

49.1

6.8

2005

10.4

28.6

0.2

2.0

52.1

6.9

2006

10.4

28.3

0.4

2.2

51.6

7.5

2007

11.9

26.0

0.2

1.6

53.0

7.4

2008

13.5

23.1

0.1

1.2

54.8

7.4

2009

14.6

25.1

0.4

0.7

52.1

7.4

2010

12.9

25.3

0.2

0.6

53.2

8.0

2000 10%-15% 2008


5.3%
0.6% 0.5%
80%


19 37

3.2.3



2012

9.3
2%
2010
2010

2010 19

20 37

3.3
GDP
1994

21 37

4.1
4.1.1

2011
2010 80%

1999

5
60%

1 5

60%


22 37

9.09

9.10

9.20

2010

2011

2012

7.38

1.70

2008

2009


13

2008 2009 1.7


7.38 2012 9.2 2008

2009
334%

2009

7200

6463
4243
2700

2679
1350

800

721 400

14 2009

23 37

4
2009

2010


1
2

3



4.1.2

2000

7
2000

2001

2002

2003

2004

500

400

250

250

150

15

95

93

54

15

95

93

54

500

415

345

343

204

2005

2006

2007

2008

2009

100

2000

159

189

318

406

1566

175

207

338

359

334

30

30

766

334

396

795

795

2666

434

396

795

795

4666

24 37

4.2

4.2.1


2010

2000
30%-50% 2010 66.7% 2011


8

( )

(%)

2001-2003

9100.0

26168.3

34.8

2004

6000.0

11893.4

50.4

2005

5500.0

15100.8

36.4

2006

7000.0

18303.6

38.2

2007

12000.0

23572.6

50.9

2008

9600.0

28649.8

33.5

2009

15900.0

32602.6

48.8

2010

27100.0

40613.0

66.7

2011

31500.0

52547.1

59.9

4.2.2
,
,,
,,,

,,

25 37


,, PPP ,,BOT(--
) PPP
BOOT(---)BT(-)TOT(--)BOST(---
)

1995 BOT
, B 4

4.3

2000
23%

1

2
3

4.4
4.4.1
2011


26 37

1
2
3

4.4.2
2005



2005
2005

2006

2007

582

2008

3200 8000

2009

1.78

2010

2011

2012

27 37

20000
18000
16000

70.00%

64.02%
18932.2

54.61%
16605.3

17934.32 17692.2
16113.56
46.82%

15301.94
14000

16732.26 16709.51

42.06%

60.00%
50.00%

40.83%

34.73% 33.83%

40.00%

31.96%

12000

30.00%

10000

20.00%
2010-3Q 2010-4Q 2011-1Q 2011-2Q 2011-3Q 2011-4Q 2012-1Q 2012-2Q

15

28 37

4.5
4.5.1

5000

600

4000

400

3000
200
2000
0

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

1000

-200


16



1990

2007

9

1990
2.21
2001
0.85

1991
2.04
2002
0.82

1992
1.95
2003
0.82

1993
1.87
2004
0.80

1994
0.89
2005
0.86

1995
0.85
2006
0.88

1996
0.84
2007
0.95

1997
0.82
2008
0.91

1998
0.82
2009
0.85

1999
0.79
2010
0.87



1994
0.80-0.90

4.5.2

29 37

2000
0.80
2011
0.88

90

90

90


1992


1


2000 10. 2 204
970 2102 55%
AAA
2

2008 18 2400

3,,
1992
188 ,
2008 132
26. 4% 21


4.5.3



30 37

87-92 12

88
2000 1000

BOT

BOT

40%

4.6

31 37

5.1

5.2


-

-

-

-

5.3

32 37

5.4

33 37


GDP
1994



34 37

35 37



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[2],,,.[J].,2010(6):6-11.
[3],.[J].,2010(21):68-71.
[4],.[J].,2012(1):77-80.
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,2012.
[6].:[J].
,2011(3):19-26.
[7].[D].[]:,2012.
[8][M].
-2009
[9],.:[J].
,2011(3):96-99.
[10].[J].,2011(12):46-48.
[11].[J].,2011(19):28-29.
[12].
[J].(),2009(12):27-30.
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[14],,.[J].
,2010(4):53-60.
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36 37

37 37

THE RESEARCH ON CHINAS LOCAL GOVERNMENT


FINANCING CURRENT STATUS AND FINANCING
METHODS

Since 2011, as the sovereign debt crisis in Europe intensified, the problem of government
financing becomes one of the hot issues of the global economic. As China's economic developed
rapidly, urbanization and industrialization process accelerating, followed by the rapid growth of
the constructive capital requirements from local government, and led to the rapid growth of the
local government debt.
Although local governments in China have tried many different methods of financing and also
achieved some goals in the financial system construction and the debt risk control, so far, however,
local government financing is still facing many contradictions and has a great deal of risk and
uncertainty which reflect the defect in financial market, legal system and other fields. So, the
research on the status of local government financing and comparison of financing methods has
certain theoretical and practical significance, either from the perspective of the development of
local government financing, or from the long-term progress of Chinas economy
First, the paper analyzes the necessity of local government financing from the principle of
public goods theory and the benefit theory. After that, this paper discusses the advanced
experience by introducing the experience of local government in other countries. From the
statistical analyses of local government finance and current situation of local government
financing platform, this paper classifies the financing methods, put forward innovative financing
channels, and makes a case study based on the example of Shanghai. Finally, this paper points out
the key problems in Chinas local government financing and comes up with relevant suggestions.
This paper does not compare the experience in local government financing to developed areas,
such as European and American. The local government debt crisis and the reform plan in Brazil
and India are introduced instead. Based on the experience from developing countries, China is
inspired in finding the direction of local government financing. The three debt crisis happened in
Brazil have enlightened China: the central government should strengthen the management of local
government debt, need to control the risk of local government debt from all aspects, limit the
supply and demand of government debt and emphasized the importance of information
transparency in the construction of government financing system at the same time. The transfer
payment system between central government and local government in India provides reference for
China's central government. The two success fiscal reforms can also be used for further
optimization of the financial system in the future in China.
Compared to the United States, Japan and some European countries which met sovereign crisis
1 3

before, the proportion of debt to GDP in China does not reach the high level. Because of the
different debt structure, debt risk in China is relatively small. After implement of the tax system
reform in 1994, the central government and local government in China have the similar income
level. However, the spending of local government is increasing, followed by the rising local
deficit year by year which led big pressure on local government financing. The asymmetry of
"financial power" and "governance power" of local government and central government is one of
the reasons that result in a shortage of local government finance. After the tax reform, shared tax
between central and local government increases greatly which results in more tax revenues to the
central government. And due to the geographical differences, the gap between the financial
situation in the eastern and the western region is become bigger and bigger. Underdeveloped areas
in western China face more severe debt pressure.
As the main carrier of local government financing, local government financing platform
experienced great growth in twenty years. So far, financing methods of financing platform is still
relatively uniform which mainly depends on bank loans. Facing the demand of urbanization,
however, the local government infrastructure will be still in high speed development, the single
mode of financing is difficult to meet the demand of money. The central government has
published a series of policies of the cooperation of the government and banks in order to control
the risk. Outlook the future development of local government financing platform, the paper points
out that the diversification of the "sunshine finance" is the same direction of central government
and local government in China.
In this paper, according to the source of funding of local government financing channels are
divided into four categories: financial allocation, debt financing, asset financing and equity
financing. Debt financing includes bank loans and bond issuance, and asset financing includes
land financing and project financing. Bank loans is still the main channel of local government
financing; The proportion of land financing in gradually reducing; Project financing is more
flexible, which is beneficial to the government and social capital to participate; Equity financing
for the financing will directly increase the capital of local financing platform which is favorable
for the platforms long-term development.
This paper also introduces innovative financing method: unsecured bonds financing platform
and bank-trust cooperation financial product. Unsecured bonds financing platform has not only the
advantages of bonds issuing but also the least government risks. Bank-trust cooperation financial
product is rising in recent years. The main innovation is that it transfer the the local government
loans from banks balance sheet which expand the new space for the cooperation of local
government and corporate banks. However, bank-trust cooperation financial product is more
suitable for developed eastern regions because of the high investment risk for underdeveloped
region governments.
Based on the analysis of financing development of Shanghai, Shanghai city Investment
Company walks in the forefront of the all local government financing platforms and developed a
diversified financing system. Facing the potential opportunities, Shanghai hopes to explore new
2 3

opportunities in equity financing.

Facing the problems of local government financing in China, this paper puts forward related
Suggestions:
1) Promote reform of the financing marketization, improve local government financial power:
the central government should encourage local governments to establish multi-level
diversified financing system. On one hand, the government should build diversified financing
channels; On the other hand, the government should set up perfect market constraint
mechanism.
2) Build standard government financing platform, promote establish sunshine debt system: the
shortage of the transparency of local government debt information system need to be
improved. The central government should promote the disclosure of implicit debt of local
government through the administrative operation and transfer it to legally explicit debt. The
central government could also try to establish local governments budget system, the balance
sheet of local government debt, early warning mechanism and reasonable control of local
government debt ratios. At the same time, third party constraint mechanisms are also needed
in the construction of the supervision policies of local government debts.
3) Because of the regional imbalances of local government financial power, central government
should formulate targeted policies: at present, China's regional economic development is not
balanced. Compared to more developed eastern coastal areas, central and western
underdeveloped areas are the platform of government financing. Facing a completely different
region characteristic, China cannot carry out a unified policy which means policies should be
conducted corresponding to less developed areas.
4) Reasonably broaden the private capital, promote the development of local government
financing diversification: the effective absorption of social capital to participate in the local
government investment projects is the reasonable way to solve the capital demand of local
government. While the public projects are facing funding pressure, plenty of private capital is
in urgent need of good investment opportunities. Except from existing project financing
methods, industrial fund is also a good channel for private capital join into the local
government investments.

3 3