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Local Government Financing Platforms in China: A Fortune or Misfortune?

31 Pages Posted: 7 Jan 2014  

Yinqiu Lu

International Monetary Fund

Tao Sun

International Monetary Fund (IMF)

Date Written: December 2013

Abstract

China’s rapid credit expansion in 2009–10 brought local government financing platforms (LGFPs) into the spotlight. This paper discusses their function, reasons behind their recent expansion, and risks they are posing to the financial sector, local governments, and sovereign balance sheet. This paper argues that LGFPs were a fortune for China in the past, but would turn out to be a misfortune if the causes of the rapid expansion of LGFPs are not addressed promptly. In this context, the paper proposes ways to avoid misfortune by: acknowledging and addressing the revenue and expenditure mismatches at the local government level; establishing a comprehensive framework to regulate and supervise local government budgets; ensuring the sustainability of the financial resources obtained from the sale of land use rights; and developing local government bond markets and promoting financial reforms.

Keywords: Governance, China, Government expenditures, Revenues, Bond issues, Banks, Credit, local government, sovereign risk, fiscal policy, and capital markets, local governments, local government borrowing, local government debt, local government revenue, local government budgets, local government financing, fiscal gap, fiscal stimulus, fiscal position, municipal bond market, local spending, fiscal deficits, aggregate fiscal, local fiscal relations, fiscal support, fiscal revenue, local government projects, intergovernmental transfers, local business, budget law, taxation, local government officials, local infrastructure, fiscal stimulus package, municipal governments

JEL Classification: E50, G21, H30, H70

Suggested Citation

Lu, Yinqiu and Sun, Tao, Local Government Financing Platforms in China: A Fortune or Misfortune? (December 2013). IMF Working Paper No. 13/243. Available at SSRN: https://ssrn.com/abstract=2375564

Yinqiu Lu (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Tao Sun

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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