Public Capital Financing of Local Governments in China: Challenges and Strategies

Abstract

Based on analyses on the usage and sources of the loans of local government-backed financing vehicles, this paper discusses the challenges of public capital financing that local governments in China face. Recently rapid increase of the loans of local government-backed financing vehicles could induce serious risk to local governments’ fiscal stability. The authors argue that the traditional thoughts focusing on inappropriate fiscal decentralization might not bring to light the core problems concerning local government-backed financing vehicles. This paper suggests that the problems indeed reflect the deficiencies of the public capital financing and investment system of local governments in China. Currently, a comprehensive solution is needed in order to establish a sustainable public capital financing system. The authors insist that a public capital financing system based on municipal bonds would be more efficient. Meanwhile, a rigorous public capital budget constraint would be indispensable to maintain local governments’ fiscal sustainability.