Combing through the creditworthiness of prefecture-level governments in China


06 Aug 2021

    HONG KONG, 6 August 2021. Pengyuan International has today released a research report on the prefecture-level governments’ creditworthiness in China. China’s administrative regions are classified into four levels: provincial, prefecture, county and township. Prefecture-level governments are generally regarded as middle-level governments that are under provincial-level governments’ control, and responsible for administering specific affairs under their jurisdiction, such as economy, education and public security. There are currently 333 prefecture-level regions in the mainland China and the prefecture-level governments are the direct or indirect controllers of over 1000 local government financing vehicles (LGFVs) that are the active participants in both onshore and offshore bond markets. In this report, we assess the creditworthiness of 327 out of 333 prefecture-level governments in China for which sufficient data are available.

    The key takeaways from this report are as follows:

    The institutional framework of prefecture-level governments is overall solid and largely predictable and stable. The prefecture-level governments typically have most of their service expenditures defined and receive predictable and stable fiscal support from their higher-level governments. The five cities (Shenzhen, Xiamen, Qingdao, Dalian and Ningbo) under state planning are exceptional in that they have economic and fiscal management authorities at the province level. As a result, they have a more robust institutional framework than other prefecture-level governments. Additionally, the central government has designated a few prefecture-level cities as sub-provincial cities, giving them more political power and financial resources than their peers.

    The creditworthiness of prefecture-level governments is generally sound. To have a credit overview on the prefecture-level governments in China, we examined the credit profiles of the majority (327 out of 333) of prefecture-level governments based on publicly available data and our rating framework. The prefecture-level governments’ indicative standalone credit profiles (SACP) are generally good, with around 79% rated between {BBB-} and {BBB+}. On top of that, the indicative credit estimates of prefecture-level governments are substantially enhanced by the support of their higher-level governments, with 65% of them being {BBB+} or above.

    Significant economic imbalance continues to exist across prefecture-level regions. There are only a few dozens of prefecture-level regions with their GDP value exceeding RMB1 trillion (USD155 billion), and most of them are in eastern China. The majority of prefecture-level regions have their GDP value of less than RMB500 billion and their economic growth varies enormously. While some prefecture-level regions in western China have experienced rapid economic growth over the past few years, many prefecture-level regions in northeastern China have seen sluggish economic growth.

    Fiscal pressure is mounting on prefecture-level governments with widening disparities. The constant fiscal stimulus to boost the slowing economy and counter the COVID-19 pandemic has been weighing on prefecture-level governments’ financial profiles. By the end of 2020, we estimate that over 63% of prefecture-level governments’ budgetary balance-to-revenue ratios were below -15%, and gaps among them had widened significantly.

    In most prefecture-level governments, debt burden is increasing but remains manageable, and liquidity is generally sufficient. We estimate that the average debt-to-revenue ratio of prefecture-level governments increased from 122% to 143% between 2018 and 2020, showing a relatively moderate debt growth and manageable debt level. Although we estimate that 76% of prefecture-level governments have liquidity coverage ratios above 100%, considerable proportion of governments have liquidity coverage ratios below 100%, meaning that they may have to walk a fine line in order to balance their cash flow and meet their liquidity needs.

    Note: Indicative credit estimates expressed in this report are Pengyuan International’s view of credit quality derived from desktop analysis based on public information. This research involves utilising public information to generate a potential opinion on the creditworthiness of prefecture-level governments in China. It is critical to stress that the credit opinions presented in this report are not a credit rating and should not be construed as such, nor should they be construed as an indicator of a final credit rating on any particular issuer, but rather are preliminary opinions of possible creditworthiness based on the research performed.

     

    ANALYST CONTACTS

    Primary Analyst

    Jameson Zuo

    +852 3615 8341

    jameson.zuo@pyrating.com

    Secondary Analyst

    Ke Chen, PhD

    +852 3615 8316

    ke.chen@pyrating.com

    Committee Chair

    Brian Lam

    +852 3615 8339

    brian.lam@pyrating.com

    MEDIA ENQUIRIES 

    Ms. Charley Lui 

    Direct+852 3615 8296

    charley.lui@pyrating.com

    RATING SERVICES ENQUIRIES

    Mr. Allen Wei

    Direct+852 3615 8324

    allen.wei@pyrating.com

    Date of Relevant Committee: 2-Aug-2021

    Additional information is available on www.pyrating.com

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