HONG KONG, 4 March 2020. Pengyuan International has today published a sector report on how the recent outbreak of COVID-19 in China would influence the economies and communities of China’s provincial administrative regions in 2020. The report highlights our view that the economic and social impacts of the epidemic will be felt unevenly across the nation.
Here are the key takeaways from this report:
The COVID-19 epidemic is likely to hurt some provinces’ economies more than others, but Hubei is definitely hit the hardest.
Our recent report “March Marks a Critical Point for China’s Economy” summarized three possible scenarios of the epidemic’s impact on China’s economy. In our base-case scenario, we expect China’s 2020 GDP growth to fall 50 basis points to 5.5%, as a result of the COVID-19 outbreak. We also believe economic losses will be felt unevenly among different provinces and regions, with Hubei being the most negatively impacted. Guangdong and Zhejiang are two provinces with more infected cases than other regions, but their well-diversified and developed economies are sufficiently resilient to absorb such an external shock, in our view. By contrast, some other more infected but less-developed provinces – such as Henan, Anhui, Jiangxi and Hunan – may see their economies come under significant pressure. More importantly, if our pessimistic and severe case scenarios materialize, we believe the economic impact will soon be felt across the entire country. On a more positive note, we believe the policy responses by both the central and local governments have been timely and effective and will mitigate some of the downside economic risks.
Chinese local governments (LGs)’ budgetary deficits are likely to rise to an all-time high in 2020 amid slower economic growth and additional fiscal stimulus measures.
We expect the local governments’ tax and non-tax revenue growth will be subdued in 2020 due to slower economic growth as well as tax and other economic incentives to support local enterprises. Fiscal expenditures directly associated with the containment of COVID-19 may not be a substantial burden to the governments’ fiscal balances, but the stimulus packages that are needed to boost the local economies will definitely weigh heavily on the governments’ budgetary performance. We estimate some provincial-level governments’ deficit to revenue ratios will increase by up to four percentage points in 2020.
With the aid of the central government, provincial-level 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.
Even though we believe the impact of the COVID-19 epidemic on Chinese LGs’ fiscal performance is manageable, its mounting pressure on local economies should not be taken lightly, in our opinion. We expect the central government willsignificantly increase its revenue transfers to support LGs in 2020, but its own fiscal capacity may also be constrained especially if our pessimistic and severe case scenarios become reality. However, given Chinese LGs’ relatively high creditworthiness among all domestic issuers, their access to the local bond market has remained uninterrupted. This should limit liquidity risks, in our view.
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