A Study on the Formation Mechanism and Risk Mitigation of China's Local Government Hidden Debt

Abstract

This article focuses on the core issue of implicit debt of local governments in China, aiming to deeply analyze its complex formation mechanism and explore systematic risk resolution paths. The research first defines the connotation, characteristics, and main carriers of implicit debt through a review of existing literature. Subsequently, the article employs a case study approach to deeply investigate the formation process of implicit debt in a specific region. The core conclusion of the study is that the formation of implicit debt of local governments is not the isolated effect of a single factor, but a systemic product. The key lies in a trinity-driven framework of "fiscal incentives - promotion incentives - financial synergy": the mismatch of power and financial rights gives rise to the fundamental "demand" for off-budget financing; the performance evaluation system centered on economic growth amplifies this "demand"; and the financial system under soft budget constraints provides conditions for the realization of this "demand". This interlocking closed loop jointly drives the scale expansion of implicit debt. Finally, based on this formation mechanism, the article proposes systematic risk prevention and resolution suggestions from the aspects of rationalizing the fiscal relationship between the central and local governments, reforming the official assessment mechanism, promoting the market-oriented transformation of platforms, and strengthening financial penetration supervision. This research not only provides an integrated theoretical framework for understanding the debt issue of local governments in China, but also offers more targeted references for policymakers.