This work provides a critical review and discussion of studies that have been conducted in the past regarding the fiscal policy and soft budget constraints of China. The author explains the concept of fiscal sustainability and reviews some of the fiscal policies adopted by China to realise fiscal sustainability. The author also evaluates the challenges towards attaining fiscal sustainability in China and discusses the the concept of soft budget constraint and how it has been cultivated into China’s fiscal policies.
Table of Contents
Fiscal sustainability in China
‘Soft’ budget constraints (SBC) in China
Literature summary and research hypotheses
Research Objectives and Themes
The primary objective of this work is to critically examine the relationship between China's fiscal policy and the phenomenon of soft budget constraints. The research explores how fiscal decentralization and the state-owned enterprise structure contribute to budgetary indiscipline, ultimately investigating whether these soft budget constraints impede the long-term attainment of fiscal sustainability in the Chinese economy.
- Theoretical definitions and assessment of fiscal sustainability.
- The impact of fiscal decentralization on local government debt and expenditure.
- Mechanisms of the 'soft budget constraint' (SBC) effect in the Chinese institutional environment.
- The role of state ownership and banking system support in perpetuating financial imbalances.
- Analysis of the link between budgetary softness and national fiscal sustainability.
Excerpt from the Book
‘Soft’ budget constraints (SBC) in China
SBC can be described as a phenomenon that arises when the source of funding finds it impossible to keep a public entity on a fixed budget (Maskin and Xu, 2001). For example, SBC occurs when a public enterprise is extracting more than efficient levels of loans and subsidy. The national government can also offer financial bailout to state owned corporations to rescue them from financial failure (Bignebat and Gouret, 2008). In China, indebted or insolvent local government entities rely on the national government to rescue them. In summary, when an organisation has a soft budget constraint, it can count on the government for financial support implying that the budget constraint is constantly breached. SBC theory indicates that state ownership is the main catalyst of SBC effect. In China, the SBC effect is more severe due to high levels of state ownership. Apart from the local governments, the state owned banks and retained state ownership in China’s SIP firms provide fertile grounds to nurture the SBC effect. Studies indicate that state owned enterprises in China have better access to credit from state owned banks and can count on financial assistance from the government during distress.
Summary of Chapters
Fiscal sustainability in China: This chapter defines fiscal sustainability according to European Commission standards and evaluates the challenges posed by government deficits and high debt-to-GDP ratios within the context of China's fiscal decentralization.
‘Soft’ budget constraints (SBC) in China: This chapter explores how state ownership and institutional factors create an environment where entities expect government bailouts, leading to chronic budget breaches and moral hazard.
Literature summary and research hypotheses: This section synthesizes the discussed literature to conclude that the prevalence of soft budget constraints negatively impacts the ability of the state to maintain long-term fiscal sustainability.
Keywords
Fiscal sustainability, Soft budget constraints, China, Public finance, Fiscal decentralization, State-owned enterprises, Government debt, Budget deficit, Financial bailout, Economic reform, Institutional environment, Moral hazard, Subnational entities, Macroeconomic risk, Banking sector.
Frequently Asked Questions
What is the core focus of this publication?
The work focuses on analyzing the intersection of China's fiscal policy and the soft budget constraint phenomenon, specifically evaluating how these factors challenge the long-term sustainability of public finances.
Which thematic areas are covered in the text?
The text covers public finance theory, fiscal decentralization, the role of state-owned enterprises, and the structural economic challenges facing China's budget management.
What is the primary research goal?
The primary goal is to assess how soft budget constraints, driven by state support and ownership, hinder the achievement of sustainable fiscal policies in China.
Which scientific method is applied here?
The study utilizes a critical literature review methodology, synthesizing existing academic studies and economic reports to evaluate the impact of institutional frameworks on fiscal outcomes.
What topics are discussed in the main body?
The main body examines the definitions of fiscal sustainability, the mechanisms of fiscal decentralization, the specific catalysts of the soft budget constraint effect, and the resulting economic risks.
Which keywords best characterize this work?
Key terms include fiscal sustainability, soft budget constraints, China, state-owned enterprises, fiscal decentralization, and moral hazard.
How does fiscal decentralization contribute to the SBC effect in China?
Fiscal decentralization gives subnational entities autonomy, but when combined with slowing economic growth and massive debt, it creates a scenario where the national government is often forced to intervene, thereby softening budget constraints.
Why is state ownership considered a catalyst for soft budget constraints?
State ownership facilitates better access to credit from state-owned banks and creates an expectation of government rescue, which removes the incentive for organizations to operate within fixed budget limits.
What is the relationship between non-performing loans and the SBC effect?
Because budget-constrained organizations rely on fiscal means such as subsidies and tax concessions, and banks are often state-owned, this system leads to a higher average of non-performing loans compared to other economies.
Does the literature suggest that softening budget constraints affects fiscal sustainability?
Yes, the literature indicates that a culture of spending beyond planned budgets and the resulting requirement for government bailouts negatively impacts the overall attainment of fiscal sustainability objectives.
- Quote paper
- Difrine Madara (Author), 2019, The fiscal policy and soft budget constraints of China, Munich, GRIN Verlag, https://www.grin.com/document/520216
