Buoyed by the recovery of economy and budgetary revenue, local governments’ budgetary strength has been reinforced. In general, less proactive fiscal policy has curbed the expansion of infrastructure construction in many regions and eased their deficit pressure. Most local governments are possessing more debt raising capacities and better liquidity positions than 2020. We believe the creditworthiness of local governments has generally improved compared to a year ago but the divergence among them has widened. On the flip side, uncertainties are accumulating amid the resurgence of pandemic this winter which may wreck some provinces’ economy, while the power shortage is restricting factory production in high power consuming regions, and the depressing real estate market could be insidiously spreading to other economic sectors. The expected enhancement of the fixed-asset investment (FAI) in the fourth quarter may weigh on the local government’s budgetary balance. Nonetheless, we do believe the entrenched credit profiles as well as prudent and conscientious fiscal and economic measures should provide the local governments with greater capability to withstand the potential downside risk than 2020.
The key takeaways from this report are as follows:
Strong consumption and steady FAI expansion of wealthy regions have led the nation-wide economic recovery in 2021, but sporadic pandemic lockdowns and power shortages are having adverse impact on some regions’ economies. The vigorous revival of consumption has propelled the economic growth in some wealthy provincial regions this year with steady fixed-asset investment (FAI) expansion. Regions such as Beijing, Zhejiang and Jiangsu registered higher economic growth than their peers in the first three quarters. On the flip side, some investment-driven economies with obsolete economic structure have seen relatively slower growth this year, such as the provinces of Qinghai, Shaanxi and Henan. We believe the world-wide power inadequacy has casted a shadow over some energy-inefficient economies such as Qinghai, Ningxia and Inner Mongolia which are also grappling with the resurgence of pandemic upon entering the winter.
Dwindling deficits, surging budgetary revenue and expenditure expansion resumption reinforce local governments’ fiscal strength. In general, less proactive fiscal policy makes the fiscal expansion no longer an urgent and imperative task for most local governments in 2021. The national general public budgetary expenditure grew 3.6% year on year as of the end of August while the national general public budgetary revenue surged 18.4% with nearly a dozen provincial-regions’ year on year revenue growth rising over 20%. Although the revenue and expenditure growth tend to even out somewhat into the rest of this year, the decrease in most regions’ deficit level is expected to be significant.
Some poorer regions’ budgetary revenue could be hindered by the central government’s crackdown on real estate. The stringent restrictions on real estate have rendered a sweeping turbulence in the property market which spills over to the land markets in provincial regions, resulting in slumping land sales. In our opinion, although the provinces of Zhejiang, Jiangsu and Fujian have relied heavily on land sales to fuel their budgetary revenue over the past few years, their land markets will not collapse on the back of their developed economies and strong domestic consumption power. However, regions such as Guizhou, Guangxi and Hebei should come under greater pressure due to their relatively large scale of land sales as well as their low per capita disposal income.
Governmental debt grew slower versus in 2020, with most governments seeing relatively sufficient leeway for debt raises. We estimate only a few provincial regions’ direct debt to debt ceiling ratio surpassed 90% at the end of September, meaning that most governments have sufficient capacity for potential liquidity needs or fiscal stimulus in the fourth quarter.
Local governments’ overall creditworthiness improves. Negative elements are accumulating and the weaker-than-expected economic performance in the third quarter is likely to prompt the policy makers to contemplate reinforcing the fiscal expansion. Nevertheless, recovering economies and narrowing deficits have strengthened local governments’ credit profiles in order to tackle economic or fiscal challenges. In addition, meeting aggressive economic targets would not be the primary goals for most provincial regions as they need to keep their deficit and debt levels in check.
Jameson Zuo, FRM
+852 3615 8341
Ke Chen, PhD
+852 3615 8316
+852 3615 8339
Ms. Charley Lui
Direct：+852 3615 8296
RATING SERVICES ENQUIRIES
Mr. Allen Wei
Direct：+852 3615 8324
Date of Relevant Committee: 8-November-2021
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