Ⅰ．Local Government Debts in China

In recent years, the financial market and the fiscal system in China have focused on the local government debts and its potential risks．The Article 28 of the Budget Law of the People's Republic of China in 1994 stipulates that “The local budgets at various levels shall be compiled according to the principles of keeping expenditures within the limits of revenues and maintaining a balance between revenues and expenditures, and shall not contain deficit”and “the local governments may not issue local government bonds, except as otherwise prescribed by laws or the State Council”．However, local governments (from provincial level down to the village and township level) and its subordinate departments and agencies have gone beyond the existing laws, through financial appropriation and the injection of assets such as land, equity to set up all kinds of financing platforms, and taking it as economic entities against the debts, thus to bear the investment of project financing of local government functions．In addition to using the local financing platform to get bank loans, issuing city construction investment bonds and other traditional financing channels, in recent years, local governments also cooperate all kinds of financial institutions to develop special investment plans, entrusted loans, trust loans, financing lease and after-sale leaseback, financial product distribution, BT (build and transfer), various financing channels of advance-fund constructions.^[1]In 2011 and 2013, the National Audit Office conducted special audits on government debt problems．According to the audit announcement in December 2013, by the end of June 2013, the province, city and county level governments have borne 10.578905 trillion yuan debt; it increased 3.867954 trillion yuan and the average annual growth of 19.97％ compared with the end of 2010．The average annual debt growth was 14.41％, 17.36％ and 26.59％ in provinces, cities and counties; at the end of 2012, there are 3 provinces and 99 cities, 195 counties and 3465 town and township governments have debt ratios higher than 100％.^[2]Therefore, the scale of local governments debt in our country are still expanding, and the task of controlling this risk in the future are still daunting.

In fact, the local debt problem has become a hidden danger which cannot be ignored in China's financial system and fiscal system, and has endangered the long-term prudent monetary policy．However, this paper is not to repeat the ideas of the academic circles about the existing local debt problems of the fiscal, financial, legal risk, or to provide a direct response to local debt problems, but to focus on the central-local relations, which are hidden in local debt problems, and the author wants to analyze, emphasize the importance of improving the rule of law of central-local relations, at the same time this work cannot be a lip service, or merely content with the specific legislative suggestions and policy proposals, but to fulfill the present fiscal and financial legal system environment in our country, to explore the constraints and corresponding institutional choices.

The rise of large-scale local debts has involved China's political and economic systems, but an inevitable reason is the local governments' resources cannot meet the needs of its current spending, simply put, the finance and administrative resources cannot match.^[3]In order to analyze this phenomenon, in addition to the local government's own factors,^[4]one important factor is, since 1980, “serving meals to different diners from different pots”as the basic characteristics of the financial system arrangement cut off the relationship between the finance and administrative power, and it put the local government in the autonomous fiscal position firstly, in fact it had caused the government responsibilities localization,^[5]especially after the tax reform in 1994 appeared “the financial power to a higher level”, and “the administrative and expenditure responsibilities to a lower level”.

At present, the central government is 48％, local finance is 52％ in the financial status in China, but the proportion of the central government accounts for only 15％ of the national fiscal expenditure, and the local actual spending will account for 85％.^[6]In this case, local governments and its officials, which are responsible for economic development (and political incentives), have to use debt financing as its last and the most important measure to make up for financial resources.^[7]For this reason, the author will discuss local government debt problem and central-local relations in the same level, and hope to find the key elements of institutional change from the real issues.

Central-local relations have always been neglected in a unitary state, but it is an important topic in constitutional government, especially for major powers, central-local relations plays a pivotal role in national constitutional system．A country not only has a natural territory, but also has a central-local relations institution territory.^[8]Since to build a country under the rule of law has become a vast majority of people's common expectations, while we should not ignore the system exploration in central-local relations in any time, moreover China's local government debt problems have bluntly put in front of us now．The division of the administrative power in central-local governments lacks consensus in fiscal or constitutional system, it is not only because the lack of integrity of laws and regulations, but also because it involves the most important interest groups in China's political system, the central government and local governments.

In the broadest theoretical classification, the division of the relation of administrative power can be seen in the relationship between state and market, the central and local, even local governments and financial institutions.^[9]Based on the topic concerned by this paper, the division of the relation of administrative power in this paper just refers to the governments at different levels, especially on the division of the central and local powers.

In the discourse system of finance, the administrative power generally refers to the responsibilities and tasks that government shall take in public affairs or services, or in a word, the fiscal expenditure responsibility．The administrative power, financial power and financial resources constitute the elements of the intergovernmental financial relationship．Considering China's current government at all levels are not the classic “limited government”in market economy countries and the “rule of law”government in a strict sense, so that we will face many problems beyond the general scope of the finance, extends to all sorts of problems associated with the government authority．So this paper will discuss that the division of the administrative power is not only about the division of responsibilities of explicit fiscal spending, but the government power in the division of the relation of administrative power in central and local governments.

The power distributions at all levels in China have involved many problems, such as the approval of infrastructure investment, the administrative authority of state-owned assets or state-owned enterprises, the permission rights of land planning, leasing and transfer．Governments at all levels also need to take some responsibility for implicit spending or warranty liability when they are in the exercise of the powers, such as government subsidies for the construction of basic public services expenditure, ensuring social stability and the employment expenditure, social insurance and social security expenditure and the expenditure of raising the social capital．The powers and duties are the same on both sides of the coin, so we have no reason to ignore any aspect of them when we explore the relation of administrative power．In fact, the debt burden scale of local governments at all levels in our country shows rapid expansion in recent years, the reason is not just because local governments bear the public service spending on education, health care and public security of community policing, but that local governments have to promote economic growth, especially the surge of financing demands on investment.^[10]So, when we talk about the division of intergovernmental duties in our country, it is necessary to watch out the administrative power which can bring implicit fiscal expenditure, while not only limited in the dominant invisible fiscal expenditure.

In present China's financial legal system, tax law system has established some formative basis; tax collection and administration, tax penalties, tax review, tax litigation also have some practical experience, the rule of law for taxation between central and local governments is gradually promoted (although there are still a lot of criticism)．But, if we look at other important area of financial relationship in central-local, on the whole, the rule of law is still very low; even it does not have law to rely on, at least the law does not play an important role in this relation．The distribution of the intergovernmental duties is often based on uncertainty, non-institutionalized policy or command, rather than on the stability of the rule of law.^[11]When we analyze the formation of local debt, we tend to attribute the cause to the relationship between the central-local government has not yet straightened out．So, when talk about China's local government debt problem today, we cannot skip the relationship between central and local government, and the study of this relation has an important practical significance.^[12]It may say that the legal system, which deals with the problem of central-local relation in our country, will largely determine the process of solving the problem of local government debt in our country in the future.

[1] See The Audit Results of Government Debts at 36 Local Governments (the announcement of National Audit Office: No.24, 2013), Jun.10, 2013.

[2] See The Audit Results of National Government Debts (the announcement of National Audit Office: No.32, 2013), Dec.30, 2013.

[3] See How to See the Local Debt Risk—An Exclusive Interview of the Director of the Institute of Fiscal Science in Treasury Department, Jia Kang, People's Daily, Nov.25, 2013; Zhao Jing, Financial Shortage Is the Biggest Sticking Point in Local Governments, Economic Information Daily, Sep.9, 2013; Tan Jialong, The Local Governments Have Other Ways to Borrowing Debts? The China Economic Weekly, Jul.10, 2012.

[4] These factors include: the performance of local government engineering investment, the central economic policies lead to the local investment impulse, the expansion of the local administrative and public institutions, rectify illegal financial institutions and the formation of the fiscal expenditure, etc.

[5] See Kai-yuen Tsui and Youqing Wang, Between Separate Stoves and a Single Menu: Fiscal Decentralization in China, China Quarterly, Vol.177, 2004.

[6] See Li Lihui, Wu Qiuyu, Lou Jiwei Analysis the Key Points of the Third Plenary Session of Deepening Reform of the Fiscal and Taxation, the People's Daily, Nov.21, 2013.

[7] See Sun Tao, The Risk of Financing Platform and Resolving Ways, China Reform, Vol.10, 2012.

[8] See Zhang Qianfan, National Sovereignty and Local Autonomy—The Legal Transformation in Central-local Relations, China Democracy and Legal System Publishing House, 2012.

[9] See Tan Jianli, Studies of the Relationship Between Central and Local Fiscal Powers, China Financial and Economic Publishing House, 2010, p.9.

[10] See Huang Ziheng, How to Remove Mines in Local Financing Platform, Chinese Reform, Vol.10, 2012.

[11] See Su Li, The Decentralization in Central and Local Governments—To Reread Section 5 of Mao Zedong's “On Ten Relations”, Chinese Academy of Social Sciences, Vol.2, 2004.

[12] See The Decision on Major Issues Concerning Comprehensively Deepening Reforms (Nov.12, 2013).