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Research on Early Warning Indicator System for Local Government Debt Risk in China
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TitleResearch on Early Warning Indicator System for Local Government Debt Risk in China  
AuthorGuo Yuqing,Yang Xuecheng and He Yang  
OrganizationNanKai University; Central University of Finance and Economics;; 
Key WordsLocal Government Debt Risk; Early Warning Indicator System; Structural Mismatch 
AbstractWe apply nonlinear early warning system of “Leading Indicators for Crisis” to research the evolution of local government debt risk in China, and identify effective leading indicators from perspectives of Noise-to-Signal Ratio, utility function assignment and composite indicators. We find that China’s debt risk stems from hidden solvency crises triggered by maturity mismatch between assets and liabilities and structural imbalance of geographical debt distribution. This risk occurrence follows the common law experienced by developing countries during urbanization. We also find the leading indicators reflecting fiscal management system, fiscal resource stability and tax base quality, usually have strong predictive power, while the leading indicators reflecting quantitative economic growth haven’t. To prevent China’s debt risk, it is necessary to built early warning indicator system and crisis warning system to eliminate information asymmetry among local governments, supplemented with realignments on alleviating vertical imbalance, hardening budget constraint, transforming borrowing mode, and strengthening financial risk accountability, which will guarantee the sustainability of local government debt financing.  
Serial NumberWP799 
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