Discussion on China´s private financial innovation mechanisms under inverted soft budget constraint

This paper uses the inverted soft budget constraint theory to analyze the relationship between the private capital local government and the financial innovation. The participation of Private Capital to local government financing is the result of inverted soft budget constraint under the economic crisis. As the crisis mitigation, the private capital try to harden the soft budget constraint by the financial innovation which in deed is the reintroduction of market mechanism. In order to encourage financial innovation, this paper also focus on emphasizing the importance of developing third party financial institutions, and try to build the market filter which fusion the function of third party financial institutions and government. By this way the government can regulate the financial innovation efficiently and realize the purpose of hardening of soft budget constraint.