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Seeing Through Frosted Glass: Assessing Chinese Local Governments’ Creditworthiness
29 Jun 2020
We employ a top-down rating approach to assess Chinese local governments’ credit profiles as we believe it better reflects with the nation’s vertically integrated governing structure. The higher level of an LG, the more power it possesses to shape intra-governmental relations, mobilise external financial resources and the more state-owned assets and enterprises it may control. Higher-Level LGs (HLG), such as at provincial level, should have better creditworthiness than a municipal level LG and so forth. LGs’ fiscal revenue growth has been muted in recent years. They have started feeling this deficit and Covid-19 could make things worse. LGs’ debts have expanded rapidly with the direct debt growth outpacing hidden debt. The difference in creditworthiness among prefecture-level city LGs can be huge and the gap is even wider among lower district and county LGs.
Identifying and Picking a Quality LGFV
28 May 2020
Local governments in China started actively setting up local government financing vehicles (LGFVs) after they were barred from direct borrowing under a 1994 budget law. However, each LGFV operates within the jurisdiction of its respective local government, and do not directly compete against each other. Under a typical LGFV structure, a local government injects assets, usually in the form of land or cash, to capitalise a legal entity that will subsequently raise funds via bank loans, bonds, or the shadow banking market, and undertakes infrastructure investments for public welfare and/or primary land development in its coverage area. In this article, we try to analyse the common characteristics of a quality LGFV.
Electric cars development in Europe likely to see a policy tailwind
26 May 2020
The possible move to exempt Value-Added Tax (VAT) levied on zero-emission vehicles (ZEV) proposed recently by the European Commission (EC) would create a strong push for Europe’s consumption on electric vehicles (EV). We estimate the retail price reduction for purchasing EV due to this VAT exemption would be around 21%. Given the fact that European region is the second-largest EV market globally – only trailing China with a compound annual growth rate of 44% in volume from 2014 – 2019, the removal of VAT on EV – should take effect eventually – in our view will accelerate the adoption of electric cars in the region as the VAT on EV is, in general, far greater than that for gasoline vehicles.
China set to metamorphosize with the transition toward electric vehicles
13 May 2020
With strong manufacturing base in battery and battery components - the core parts in electric vehicles (EV), China has evolved to be sufficiently competitive in the global battery manufacturing battleground against Korea and Japan. We believe embracing electrification is strategically vital for China to reverse its lagging position in the global automobile industry as fuel-engine cars would be endangered by the substitution from EV in the future. However, the investment in electrification will in the short run negatively weigh on the credit profile of companies from our samples, but will pay off in the long run. Noticeably, debt level for these companies, in our view, will further increase thanks to the highly capital-intensive nature for EV-related investment. We expect sampled companies in Chinese battery and battery components manufacturing industries will stand out with a higher ROIC in the longer term as they are more valued-added in the EV supply chain.
Are Ratings All the Same? – A Comparative Analysis of Domestic and Global Ratings
11 May 2020
We select samples of China’s corporate issuers and asset-backed securities (ABS) with domestic and global credit ratings to compare and analyse the differences in the two rating scales and the reasons behind such differences. While domestic and global ratings on asset-backed securities (ABS) products are relatively similar, the ratings on corporate issuers of domestic Chinese CRAs are 8.69 notches higher on average than those of global CRAs. Compared with domestic ratings, global ratings demonstrate more significant variations in different firm types and industries, and a better discriminatory power. The results of the Receiver Operating Characteristics (ROC) curve analyses show that global ratings are superior to domestic ratings in terms of ranking power for credit risks, but domestic ratings still provide valuable information on credit risks.
Pengyuan International has published its Global Rating Criteria for Corporate CDOs
16 Apr 2020
The Global Rating Criteria for Corporate CDOs describe our approach in evaluating the creditworthiness of corporate Collateralized Debt Obligations (CDOs), including transactions of corporate loan portfolios, Collateralized Loan Obligations (CLOs), and transactions of corporate bond portfolios, Collateralized Bond Obligations (CBOs). It provides our analytical framework for rating cash flow CDOs backed by portfolios of corporate debt and synthetic CDOs referring portfolios of corporate obligations (Corporate CDOs). These criteria may also be applied to assess other transactions that share similarities with Corporate CDOs, such as transactions backed by portfolios of sovereign securities, municipal debt and project finance loans.
See China’s ABS Through the Lens of Domestic Structured Finance Ratings
27 Apr 2020
This report attempts to bridge the gaps in understanding China’s ABS market by studying the rating transitions of the structured finance ratings issued by domestic rating agencies in China. We start with a review of the unique market structures of China’s ABS markets before analysing the characteristics of the structured finance rating transitions in China. We further examine the rating performance of the fee income rights ABS, which is a distinctive asset sector in China’s ABS market. Moreover, we provide comparisons between the corporate and structured finance rating transitions and attempt to explain the findings.
COVID-19’s Impact May be More Profound and Prolonged than Expected
22 Apr 2020
As the COVID-19 crisis continues to wreak havoc across global economies, we now believe that the pandemic’s impact on China may be more profound and prolonged than our expectations back in February. Our increased caution stems from the sharp contraction in the economic activity of China’s key trading partners, slower than expected resumption of work and production domestically, as well as the more restrained policy responses and support by China’s government so far. In view of the risks these emerging trends pose, we have revised down our 2020 real GDP forecast for China from 3.1% in our prior severe scenario to a base-case estimate of 1.5–2.0%. We have also revised a number of other macro forecasts which, on aggregate, paint a more challenging picture for China’s public finances, corporates, and households for the remainder of the year.
Wealth management regulations likely to be postponed
26 Mar 2020
We anticipate that the Chinese regulators will take an accommodative approach in pushing through reforms in the wealth management product (WMP) market in the remainder of 2020. This will give the joint-stock banks (JSBs) a much-needed buffer amid a difficult environment, in our view. The new regulations – originally targeted for full implementation by the end of the year – call for fundamental changes in the way WMPs are designed, sold and priced. While the banks have made significant progress in improving their market structures since 2018, a few hurdles remain.
COVID-19 is not destructive to Chinese LG's creditworthiness yet, but downside risk is mounting
4 Mar 2020
The COVID-19 epidemic is likely to hurt some provinces’ economies more than others. Hubei is the most negatively impacted, while Henan, Anhui, Jiangxi and Hunan may also come under significant pressure. Guangdong and Zhejiang have more infected cases than peers but their economies are resilient to absorb such external shock. With the aid of the central government, provincial governments may maintain their creditworthiness in the near-term. But if our pessimistic or severe assumptions materialize, there may be pressure on their ratings in 2020-2021. As of today, Pengyuan International has rated 15 provincial-level mainland Chinese governments.
China’s auto-loan ABS market 2020: characteristics and outlook (Chinese)
27 Feb 2020
HONG KONG, 27 February 2020. Pengyuan International has released one research report, “China’s Auto Loan ABS Market 2020: Characteristics and Outlook”.This research report studies the creditworthiness of auto loan asset-backed securities (ABS) issued in China Interbank Bond Market based on the analysis of the ABS transactions’ underlying asset quality, note performance, transaction structure, counterparties, and legal structure.
March marks a critical point for China’s economy
26 Feb 2020
In our view, the full-year impacts of the COVID-19 epidemic may be determined by economic activity in the month of March. While we remain cautiously optimistic on the economy’s resilience in 2020, we present three likely scenarios that may materialize in the remainder of the year. These scenarios inform our views on individual corporate sectors and we will continue to review our macro assumptions as new data points become available.
COVID-19 tests property developers’ liquidity
25 Feb 2020
The suspension of property sales in China will pressure developers’ liquidity in the short-term and squeeze their profitability in the medium-term. The delay in construction caused by the infection will lead to a decline in investment in construction, and a slow down in property sales and land acquisition. Developers who have a low-cost landbank and conservative land banking strategy are likely to have a more flexible pricing strategy. Small developers who have tight liquidity and difficulties access funding will see credit profile deteriorate. We maintain our previous view in late February that credit profile will diverge among different property developers in China.
China's passenger car shipment likely to see further drop due to COVID-19
24 Feb 2020
China's passenger car shipment is likely to see further drop due to COVID-19. We stick to our view published in early this year that creditworthiness among automakers will diverge amid the sector downturn. With a great proportion of the entire supply chain of auto manufacturing in China being hurt by the pandemic, tier-one carmakers are more operationally and financially resistant to the epidemic, while small-scaled players are very vulnerable to this wide-spreading shock. We expect the sector leverage, measured by Debt-to-EBITDA ratio, to further rise in 2020.
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