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Classification of Local Government Debt Risks and Countermeasures(No.122, 2016)


By Zhang Wei, the General Office of DRC

Research Report No.122, 2016 (Total 5005) 2016-9-12

Abstract: At present, China’s economic and social development is experiencing a period of transformation with economic growth continuing to slow down. The rapid expansion of local government debt is subject to limited financing channels, resulting in relatively weak solvency ability and increased debt risks. This paper, based on the statistical data of provincial debt across the board, analyzes the overall situation and provincial differences relating to local government debt risks, and classifies local debt risks under different levels according to the status of local government debt, the projected financial condition, and the general review of the static characteristic and dynamic development trends in various provinces. The paper has reached the following conclusions. First, the current local government debt balance and debt risks indicate a growing trend, but the overall risks are still under control. Second, as the debt ratio of some provinces have passed the international alarm level, it is necessary to guard against, with caution, the exposure of debt default risks. Third, the significant differences through debt risk classification indicate that financial market participants face different credit risks relating to their investment in local bonds with different risk levels. As for provinces with higher risk levels, investors should not simply apply the concept of “rigid payment”.

Key words: local government debt, classification of risks, financial market, investment