Research on rigid repayment of local government debt in China

Abstract

In China, the highest national authority, central government departments, and local governments are highly concerned about local government debt issues and rigid payment problems. They worry that the default of local government debt may trigger systemic risks. In recent years, some provincial state-owned enterprises directly controlled by local governments have defaulted on their public bonds and even declared bankruptcy, breaking the rigid payment of provincial state-owned enterprises. These default events have drawn widespread attention from central, local governments, and academia. Currently, there is a lack of research on the conditions for breaking rigid payments of local government debt in China and the evaluation system for assessing the ability to break rigid payments. Based on the author's long-term practical experience in the financial industry and social resources, this study aims to answer the following questions: Which local governments in China have the ability to break rigid payment mechanisms? Which local governments lack this ability? In which areas should local governments strengthen their efforts to improve their ability to break rigid payment mechanisms? What impact will breaking rigid payment mechanisms have on local governments, state-owned enterprises, private enterprises, and surrounding provinces and cities in areas where local governments lack the ability to break rigid payment mechanisms? This study will explore the establishment of an evaluation index system for the ability of local governments in China to break rigid payment mechanisms. It will provide helpful policy recommendations for resolving local government debt risks and promoting high-quality economic development in China. The author will first use literature search and sorting methods to collect and organize outstanding papers and documents from influential journals or those with high impact factors related to the topic. Secondly, the study will employ on-site investigation and research methods to conduct in-depth investigations and research in local government departments and state-owned enterprises in Guangxi, Chongqing, Henan, Sichuan, and Guizhou provinces, cities, and counties. Additionally, the study will collect and organize data from Wind database, local government official websites, government work reports, and other information channels, covering all the main provinces and cities with relevant information on local government debt, state-owned enterprise bond issuance, and private enterprise bond issuance. Qualitative and quantitative analysis will be conducted based on the collected data. Subsequently, the author will utilize the DID (Difference-in-Differences) method to analyze the natural experiment of the provinces that have already broken the rigid payment mechanism. The study will focus on the impact of Guangxi, which has actually broken the rigid payment mechanism, on its own province, cities, and neighboring provinces like Henan in terms of the total amount of bond issuance and bond interest rates by state-owned enterprises. Finally, the author will first employ regression analysis, fuzzy layer analysis, and entropy value methods to determine the weight of five major factors: government financial strength, debt status, economic quality, institutional environment, and government incentives. Following the principle of substance over form, the study will use iterative clustering analysis to classify the five factors based on their importance. The model's classification analysis results for each factor will ultimately be represented as Category A, Category B, or Category C. Based on this, the comprehensive evaluation score for each province's ability to break rigid payment mechanisms will be calculated by assigning values to the categorized factors. This article innovates from the perspective of practice and theory. First, it proposes and analyzes the prerequisites for local governments to break the rigidity of debt repayment based on the combination of practice and theory, and attempts to establish a local government debt repayment capacity evaluation system in China through DID analysis of natural experiments in cases where the rigidity of debt repayment has been broken. Second, from the perspective of practical application, it provides relevant reference basis for local governments, local state-owned enterprises, and financial institutions to control and resolve debt and credit risks, and to formulate debt plans. Third, from the perspective of investors and practitioners, it proposes to unify the local government financing platforms and traditional state-owned enterprises into local state-owned enterprises according to the principle of substance over form, providing full practical evidence and theoretical basis for exploring the difficulties in solving the hidden local government debts, and providing reference basis for subsequent government precision policies, efficient management, and high-quality development. The article concludes with some policy recommendations. 1. At present, local governments in China do not have the ability to fully break the rigidity of government debt repayment, but some provinces and municipalities have the ability to break the rigidity of local government debt repayment in a market-oriented manner. 2. Local governments that do not have the ability to break the rigidity of debt repayment but forcibly break the rigidity of local government debt repayment have paid significant costs. 3. It is recommended that the central government formulate quantitative evaluation standards, and each provincial-level people's government, in accordance with the standards and based on the actual situation of each province, carry out quantitative evaluation and control of the capital investment capacity and debt management capacity of local governments at the city and county levels annually. 4.Local government debt in China is generally safe and controllable. The fundamental measure to solve the local government debt problem is to promote the sustainable and stable growth of local economies, thereby consolidating market participants' confidence. According to the Solow Model, total factor productivity (TFP) is a key driver of economic growth. In the long run, local government debt in China still has relatively large space for new additions, and it continues to have the basic conditions for implementing proactive fiscal policies. 5.The government should strengthen investment in human capital by directly distributing universal consumption coupons and digital RMB to families with two or more children, thereby stimulating positive growth in China's birth rate and boosting consumption, which would in turn drive domestic demand. 6. The government should highly value the construction of the talent education system and increase investments in talent cultivation. It should elevate the importance of respecting teachers and emphasizing education to the level of national strategy. By fully leveraging the advantages of China's socialist system, the government should research and develop a scientific talent cultivation system tailored for infants, adolescents, and young adults, with a focus on basic scientific research and digital information technology. This will enhance the quality of China's labor force. Recommendations for National Policy-oriented Financial Institutions. 7.To leverage the institutional advantages and cultural advantages of China's existing system, national policy-oriented financial institutions should provide ample high-quality financial resources directly to private enterprises, particularly small and medium-sized private enterprises. These resources can include digital RMB, universal consumption coupons, equipment and facility-type special consumption coupons, etc. By doing so, the financial resources can be allocated in a more market-oriented manner, reducing the crowding out effect caused by the rigid payment requirements of state-owned enterprises (SOEs) and local government-owned enterprises. This approach will help invigorate domestic enterprises, promoting high-quality and stable development of China's industrial and financial economy.