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1. Introduction
The debt problem of Chinese local government begins to expand rapidly after the tax-sharing reformation in the 1990s. After the subprime mortgage financial crisis in 2008, to promote the rapid recovery of the economy, the authorities launched a project investment plan with yuan 4tn. Among this, 70 per cent was undertaken by local governments, which hampered their fund raising. There is a gap between the income and expenditure of local governments. To support the central government finance, they could only issue bonds to stimulate the development. In 2015, to regulate the financing methods of local governments, the state council issued regulations allowing local governments to issue bonds on their own. Given the advantages of issuing local government bonds in expanding financing channels, by reducing government financing costs and improving the quality of public services, many local government bonds have been issued since 2015, which has presented a rapid growth. However, excessive debt will increase the pressure on bond repayment, and once the debt risk accumulates to the warning level, it will cause great damage to the local economy (Allen et al., 2004; Altavilla et al., 2017; Andrikopoulos and Khorasgani, 2018; Altavilla et al., 2017; Auvray and Brossard, 2012). Up to October 2018, the total custody amount of local government bonds in China had exceeded yuan 18tn. Once such a huge amount of local government bonds leads to systemic financial risks, they will eventually become the economic risks taken by the central government and all taxpayers (Boffelli et al., 2015; Brown, 2017).
KMV model is a method established by KMV company in San Francisco in 1997 to estimate the default probability of borrowing enterprises. There have been many studies on the local government security issuance boundary, especially on KMV model research (Crouhy et al., 2000; Dincer, 2019). Allen and Powell (2012) used KMV model to analyze the fluctuating default risk of Australian banks, and Zhou and Hui (2015) conducted surveys that showed that KMV model could assess credit risk analysis of local government financing platform. Study by Chen et al. (2010) showed the importance of KMV model on analyzing credit risk measurement and early warning of small and medium-size enterprises in China, while Feng and Guo (2019) and Li