Abstract: The fiscal relationship between the central and local governments has a profound impact on the formation and governance of local government debt. From the theoretical perspectives of decentralization incentives and moral hazard, the institutional roots of local government debt risk in China lie in that, on the one hand, local competition under fiscal decentralization would drive economic growth, but it also potentially leads to excessive borrowing for investment by local governments. On the other hand, due to insufficient fiscal rules, local governments have formed widespread expectations of central government bailouts, exacerbating the moral hazard of excessive borrowing. The experiences of the EU and the US, both of which are unified currency areas, provide important enlightenment for China. After the European debt crisis, the EU recognized the need to establish a unified and credible fiscal rules system to effectively supervise local fiscal behaviors through clear punishment mechanisms. The US, through its federal system, curbed local debt expansion by relying on a more well-established fiscal decentralization framework and utilizing more comprehensive information disclosure and market-based debt pricing mechanisms. Drawing from these experiences, a feasible reform direction for China to resolve local debt risks is to address both the supply and demand sides of funding, establish credible fiscal rules, and further strengthen financial market constraints. By adjusting decentralization incentives and controlling moral hazard to optimize the central-local fiscal relationship, China can use reform as a driving force to promote stable growth and risk prevention.

Key words: central-local fiscal relations, local government debt, fiscal decentralization, fiscal rules, international comparison