How to have the cake and eat it? Risk Governance of Local Government Financing Vehicle under Legal Debt Pressure

【Authors】

GUO Yuqing, NIE Song, CHEN Chuanglian & WANG Hao

【WorkUnit】

GUO Yuqing, NIE Song（Nankai University, 300073）；CHEN Chuanglian（Jinan University, 510632）；WANG Hao（Central University of Finance and Economics, 100081）

【Abstract】

Risk governance of Local Government Financing Vehicles （LGFVs） is the focal point of concern across society. Establishing a long-term mechanism to alleviate implicit debt risks and accelerate the LGFVs reform and transition has gathered consensus at the theoretical and policy levels. Unlike conventional studies, this paper emphasizes that liquidity credit enhancement is a core institutional element in the LGFVs’ risk governance. In the process of LGFV reform and transition, there is often a trade-off between mitigating liquidity risk and improving investment efficiency. Effectively balancing these two dimensions of risk governance is a pressing challenge in addressing the issue of implicit local government debt.
Based on the severe situation of local government debt governance, this paper tries to strengthen the risk governance of LGFVs and promotes the market-oriented reform and transition to provide a new perspective for risk governance. Based on the perspective of liquidity credit enhancement under the Chinese-style fiscal and financial system, this paper conducts econometric analyses on the governance effectiveness of liquidity risk and investment efficiency risk of LGFVs under the legal debt pressure. The results show that two types of LGFVs’ risks exhibit heterogeneous governance effectiveness. The legal debt pressure significantly reduces the liquidity risk but increases investment efficiency risk. Although the medium- and long-term credits provided by financial institutions for debt reduction in LGFVs have successfully alleviated liquidity risk in high-debt regions, this action has also contributed to the accumulation and coalescence of investment efficiency risk in regions with high growth targets and strong credit interventions. 
This paper makes three contributions. First, studying LGFVs’ risk governance from the perspective of “liquidity credit enhancement” under the Chinese fiscal and financial system not only enriches the study of corporate risk governance, but also provides a new governance idea for alleviating local hidden debt risks and promoting the reform and transformation of LGFVs. Secondly, utilizing the authoritative data of local government debt, this paper distinguishes the local financing vehicle liquidity risk and investment efficiency risk to carry out measurement research, which has efficiently improved the research credibility. Thirdly, to have the cake and eat it, this paper provides a policy framework for strengthening performance assessment, improving corporate governance, optimizing the business environment, and preventing grass-roots risks, thus governing the double risks of LGFVs and promoting the reform and transition.

JEL: H63, H81

【KeyWords】

Legal Debt Pressure, the Reform and Transition of Local Financing Vehicle, Liquidity Risk, Investment Efficiency Risk