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Prof. Hu Jiayin: Judicial Reform and Local Debt Financing Cost

Apr 29-2024   



Since 2017, suppliers, especially those that are publicly listed private enterprises, to local governments have experienced problems such as a rise in receivables, a drop in cash flow ratio, and an increase in equity-pledge financing. This indicates that as the central government resolutely carries out de-leveraging policy to contain hidden debts, local governments may have passed liquidity pressure on to private enterprises, wrote Hu Jiayin, NSD Associate Professor, in a commentary. What has happened therefore points to the complexity of the systemic undertaking to dissolve local government debt and the importance of enacting relevant policy.

 

The commentary is part of a NSD series that looks into the fiscal and taxational relations between the central and local governments and aims to offer advice on the effective management of local governments’ debt risk. All commentaries are based on papers by NSD researchers. In a follow-up commentary, Prof. Hu, who is also Research Fellow with both PKU China Center for Economic Research (CCER) and PKU Institute of Digital Finance (IDF), said that there are two major solutions to push local governments and SOEs to pay back debts. One is through administrative power; for example, the central government can issue policies to ensure debt payment, provide ad hoc funding, and punish those that fail or drag feet to settle. The other solution is to turn to the market, which for Prof. Hu not only refers to relevant financial services and market construction, but also the role of the judiciary as the infrastructure for market economy.

 

In this commentary based on the working paper ‘Empowering through Courts: Court Capture and Municipal Financing in China’ by Prof. Hu and her co-authors, the strengthening of judicial independence was found to have resulted in lower litigation winning rates for municipal investment companies (MIC), which facilitates contractors and suppliers to recover arrears. On the other hand, judicial reforms caused a decline in MIC’s net bond issuance and a jump in their financing cost. Local governments’ MIC-based financing capability was trimmed, and MIC’s outlays and land procurement capacity slid.

Prof. Hu Jiayin: Judicial Reform and Local Debt Financing Cost

Apr 29-2024   



Since 2017, suppliers, especially those that are publicly listed private enterprises, to local governments have experienced problems such as a rise in receivables, a drop in cash flow ratio, and an increase in equity-pledge financing. This indicates that as the central government resolutely carries out de-leveraging policy to contain hidden debts, local governments may have passed liquidity pressure on to private enterprises, wrote Hu Jiayin, NSD Associate Professor, in a commentary. What has happened therefore points to the complexity of the systemic undertaking to dissolve local government debt and the importance of enacting relevant policy.

 

The commentary is part of a NSD series that looks into the fiscal and taxational relations between the central and local governments and aims to offer advice on the effective management of local governments’ debt risk. All commentaries are based on papers by NSD researchers. In a follow-up commentary, Prof. Hu, who is also Research Fellow with both PKU China Center for Economic Research (CCER) and PKU Institute of Digital Finance (IDF), said that there are two major solutions to push local governments and SOEs to pay back debts. One is through administrative power; for example, the central government can issue policies to ensure debt payment, provide ad hoc funding, and punish those that fail or drag feet to settle. The other solution is to turn to the market, which for Prof. Hu not only refers to relevant financial services and market construction, but also the role of the judiciary as the infrastructure for market economy.

 

In this commentary based on the working paper ‘Empowering through Courts: Court Capture and Municipal Financing in China’ by Prof. Hu and her co-authors, the strengthening of judicial independence was found to have resulted in lower litigation winning rates for municipal investment companies (MIC), which facilitates contractors and suppliers to recover arrears. On the other hand, judicial reforms caused a decline in MIC’s net bond issuance and a jump in their financing cost. Local governments’ MIC-based financing capability was trimmed, and MIC’s outlays and land procurement capacity slid.