By Wei Jianing, Meng Chun & Zhang Junwei, Department of Macroeconomic Research, Development Research Center of the State Council (DRC)

Research Report No 3, 2015 (Total 4688)

Abstract:

By the end of 1994, there was a financial crisis in Orange County, California, US, caused by its huge losses in financial derivative transactions. When the crisis hit, the county took steps, such as increasing taxes, cutting government spending, debt restructuring and legal proceedings against Merrill Lynch which sold financial derivatives to the country, to deal with it, so it got out of the crisis in a relatively short period of time.

This paper gives details on the cause of the financial crisis and Orange County's way of dealing with it. By taking lessons from it, this paper offers suggestions on improving China's local government debt management. The Orange County case gives China a warning that the country needs to improve its local tax system, open sources for local governments, increase local budget restraints, develop a debt accountability system, push forward the improvement of the financial system through better debt management, and establish a local government financial bankruptcy system.