China's Local Government Debt Risk Assessment and Management Based on KMV Model

In order to sustain growth rates, China's local government borrowed heavily through a variety of means. Appropriate debt can provide funds for the development of the region and guarantee funds flow smoothly, which is conducive to local economic development. However, excessive debt will bring risks and even lead to a debt crisis. After the tax-sharing system reform in China, the debt scale of the local government has expanded greatly. The debt issuance, management and use have encountered big problems. Coupled with the widespread lack of perfect debt repayment mechanisms and supervision system, the credit risk of local government debt is obvious and continues to accumulate. Based on the risk management theory, this paper chooses X City as a case to study on the Debt Risk Management of local government by using literature review method and the combination of both qualitative and quantitative methodologies. Through collecting the 2016 data of the local government debt in X City, this paper expounds the present situation of local government debt risk and analyzes its influence factors. It also measures the risk of local government debt via KMV model and predict the scale of X City's next issuance of local government debt and its EDF (Expected Default Frequency). Finally, this paper puts forward some local government debt risk prevention and control suggestions.