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Separate the interest of the introduction of municipal bonds

Author: ZhangLin From: www.yourpaper.net Posted: 2009-03-31 19:36:20 Read:
Abstract: This article discusses China's implementation of municipal bonds, will face between central and local government, the benefits division between local governments, as well as a rational investor, after the introduction of municipal bonds wealth optimum partitioning and this three groundbreaking explore, to lead to more in-depth and meticulous research scholars.
Keywords: municipal bonds separate the interest of a balanced

For the 2008 Olympic Games, Beijing will invest 180 billion yuan directly for municipal infrastructure, thus driving investment will be around 300 billion yuan, in 2010 Guangzhou Asian Games and the World Expo in Shanghai, the need for municipal construction costs were 220 billion and 300 billion. But living in the forefront of the country's economic development of the three cities of the annual local revenue of only forty-five billion. Obviously, rely on the financial support of the central government and local government over the same period of fiscal revenue can not support such a huge capital flow. Moreover, China is in the accelerated phase of urbanization and huge capital requirements, and how to raise hundreds of billions of dollars per year in urban construction funds, the key issues to be solved. View from treasury bonds, China's dependence on debt (50%) far exceeds the internationally recognized financial dependence on debt "security line" (25% -30%), is generally believed that the national debt repayment rate should be controlled in the international around 10%, while in 1998 more than 24%, so relying on the issuance of treasury bonds to increase local government investment in municipal construction space is also very limited.
In this regard, the experience of the United States and Europe through the issuance of local government bonds to solve the problem of the funding gap in the process of urbanization, China can also learn from the advanced experience of foreign countries in national conditions on the basis of. Should be noted that the implementation of the municipal bonds should be sparse not be blocked, otherwise, many local governments will take a number of alternative ways of debt issuance and financing activities, through the establishment of some part of the local government's investment company, the company's platform, but is not conducive to the normalization of the country's financial market development.
Research has focused on the issue in three directions: First, the foreign experience of the operation of municipal bonds and Implications for China (Xu Shijie 2001, Luowen 2002, Yang Ping 2004); second is the need of the issuance of municipal bonds in China ( Wang Yi In 2002 Tao Xionghua 2003, Song Li 2004); risk and scale of the issuance of municipal bonds determination (Han Liyan 2003, Wang Gang, 2003). However, the split between the interests of the implementation of municipal bonds in China will face between the central and local governments as well as local government on the sensitive topic to date researchers lack In addition, as a rational investor, after the introduction of municipal bonds, the financial markets will How to achieve the optimal allocation of resources is also worthy of attention. Pioneering of this article want to try to do in these three areas.

Interests between the central and local governments split

The disposable income of the local government are mainly two channels: First, local taxes the central subsidies or transfer payments. Even in the revenue-sharing is the most thoroughly American, the federal government still give local government financial subsidies. China has adopted to take into account the type of revenue-sharing, so the central government to local government financial subsidies or local government reliance on central more serious. The municipal bonds significance lies to central can reduce the direct or indirect subsidies to local governments, and the conversion of part of the financial subsidies for the appropriate expansion of the local government tax equity, thus strengthening local financial independence to support the issuance of municipal bonds. The question now is, the tax total equity of the central ceded to local governments what proportion of the central fiscal revenue should be accounted for before the introduction of municipal bonds, in order to achieve optimization of both benefits division.
Assuming that the proportion of a; continuous function of the the T consolidated bank deposit interest income tax after the introduction of municipal bonds, investing in stocks, funds and other capital gains tax, personal income tax rate constructed single wealth tax increase; local residents wealth at the beginning of the pre-tax total W0, t when the end of the period after tax total wealth Wt; municipal bond interest rates rm, equivalent to the average rate of return of other assets in the market without the risk-free rate r, local residents wealth maximization function:

Thus, after the introduction of municipal bonds, the central government ceded to the local government tax equity should be accounted for prior to the issuance of municipal bonds, the the optimal central fiscal revenue accounted for a * to split the optimal balance between the interests of the central and local governments. Because, if approved municipal bonds accounting for the size of the central budget is too small, that is a less than a * construction of local government and local residents, you can not achieve the full development of the legitimate need, can not play the supporting effect of the municipal building. Municipal bonds account for the scale of the central budget is too large, that is, a greater than a *, equivalent to a central place to give excessive subsidies, not only the central tax loss of power. Easy to breed local government inert.

Between the interests of local governments split

In addition to the interests between the central and local governments split among local governments will benefit segmentation problem. Once the central government to allow local governments to issue municipal bonds, then the number of local governments to issue municipal bonds, will appear different municipal bond issuance main competition in the financial market situation. When an economic system in the presence of a number of municipal main success of the municipal bonds issued or not is inextricably linked with the market demand. A certain period of time, the total financing and the total social wealth in the financial markets is established, a regional financing increase is to learn from other areas of household wealth transfer to achieve. So, the competition results of the municipal bond is essentially a zero-sum game between the multiple municipal body.
The effect of this competition is extremely complex, and the most direct manifestation of geographical segmentation of the issuance of municipal bonds. Geographic segmentation will lead to differences in supply and demand characteristics of the municipal bond market. Especially from the supply of bonds for a specific area to the municipal bond income differences in the supply of the issue facing the country, public investors as the demand side of the bank pledged collateral requirements for the differences in the municipal bond interest rates, offsite issued or purchase access to information cost differences. These factors may even places investors a lucrative arbitrage positions, and thus give rise to trans-regional arbitrage activities.
The split of the size of the issuer is the same geographic segmentation inseparable another problem, a small municipal body (ie the relative backwardness GDP and population density is smaller main issue municipal bonds) are generally guaranteed by local government revenue to municipal bonds sold to local investors. By contrast, the large municipal body in addition to government revenue guarantee can also be passed through the strength of the international rating agencies to give investors adequate information and sufficient confidence, even by international insurers syndicated joint guarantee the domestic remote investors and even foreign investors as a sales market. A large number of facts show that the benefits enough to do so although the surface of the interest cost is relatively high, but the sales market expansion beyond the increase in cost, in order to convey a great convenience and benefits of the issuer.
Look at it from the other side, the big cities and small cities to issue market debt interest cost constraint functions are completely different. Rating of Moody's or Standard & Poor's to many small municipal body is not looking for, for two reasons: First, the lack of local economic strength, also is likely to assessment than the economic strength of the major cities have poor results even though participation in the rating, but have to pay the high rating costs and guarantee fees, that is not feasible. Second, because they are able to issue bonds within a narrow range of market, without the need to provide investors with the financial markets, the economic environment as well as the geographical characteristics of the information and pay additional interest cost, that do not have the need for. Rating fees and application materials usually cost more than the potential benefits of issuing bonds in these areas, the small city in a small range of market issue, and the ability to replace the rating company or guarantee company to obtain the recognition of the investor, then do not participate in rating and guarantees, thus saving issue costs relative increase bond yields is small municipal body to participate in the municipal bond market, the competition in a way of life.

Optimal segmentation of investor wealth
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