HONG KONG, 15 February 2022. Pengyuan International has today released a research report “Reinforcing Proactive Fiscal Approaches Unlikely to Strain Chinese Local Governments’ Credit Profiles in 2022”.
Under the material economic downward pressure, Chinese local governments (LGs) are undertaking increasingly important responsibilities to drive the local economy, leveraging on the reinforcing fiscal measures and debt raises in 2022. The slowing economic growth and the constant tax and fee cuts tend to restrain the revenue collection of LGs, and the bleak property market is yet to revive, sapping the LGs’ land sales. Fortunately, the fiscal retrenchment and economic recovery in 2021 had alleviated most LGs’ debt and deficit pressure and entrenched their creditworthiness, which had paved the way for the fiscal stimulus in 2022. The loosening monetary conditions and the potentially increasing debt ceilings will facilitate the LGs in accessing the external financing and securing the liquidity. Therefore, despite the negative conditions and lumping uncertainties ahead, we set a stable outlook for LGs’ creditworthiness in 2022.
The key takeaways from this report are as follows:
Augmenting fixed assets investment (FAI) is set to sustain the economic growth in 2022 with provincial regions facing diverse pressure to meet their GDP targets. Headwinds in the second half of 2021 such as the see-saw pandemic ride and weakened global demand have mired the country’s economic recovery. With economic stabilisation as the pivotal goal in 2022, the central government has shown substantial inclination to expand FAI using fiscal and monetary measures, and the provincial regions have stated relatively high economic growth targets in 2022. Only 10 provincial regions’ average GDP growth during the period of 2020-2021 met 6%, while more than 20 regions set their GDP growth goals at around 6% or more in 2022. This necessitates proactive fiscal approaches and enhancement of FAI in some provincial regions whose economic ambition does not correspond to their economic momentum.
To execute the national fiscal expansion scheme, local governments’ (LGs) deficit is expected to widen substantially but remains manageable in 2022. The economic revival and fiscal retrenchment in 2021 have generally decompressed the fiscal pressure on LGs and partly prepared them for the potential deficit swell in 2022 owing to the resumption of proactive fiscal strategy. However, the intensifying fiscal imbalance could be a significant challenge to some LGs, which have onerous and inefficient revenue generation. In our opinion, the downswing in LGs’ land sales caused by the turmoil of the property market is likely to prolong for a few months and rally thereafter in 2022. We believe the central government has eased its grip over the real estate sector since the end of 2021 in order to stabilise the economic progression. This should render the land sales of LGs to gradually resume and become more polarised than before since the real estate developers tend to concentrate their land acquisition on wealthier and lucrative regions.
LGs’ debt issuance is expediting, while debt level is mounting. The RMB1.46 trillion of advanced incremental bond limit and massive funds carried over from debt issuance by the end of 2021 should ensure LGs’ liquidity in the first half of 2022. The central government has prodded the LGs to issue bonds earlier this year to support the infrastructure construction and play an active role in bolstering the economic growth. We project the LGs’ special bond and general bond ceilings to be lifted by RMB3.8 trillion and RMB900 billion respectively in 2022, and roughly 80% of incremental debt limits of this year to be utilised in the first half. LGs’ leverage will generally increase by the end of 2022, pressurising those with already-high debt levels, such as Tianjin and Guizhou.
Stable outlook is set for LGs’ creditworthiness in China in 2022 with increasing tail risk. Although deficit and debt levels are to be elevated, the LGs’ generally ameliorated credit profiles in 2021 have braced themselves for the fiscal stimulus in 2022. The dovish monetary conditions and the potentially rising debt ceilings will facilitate LGs in accessing the external financing and securing the liquidity. We believe the central government’s effort to decouple the credit profiles between local government financing vehicles (LGFVs) and LGs should not be imperative in 2022, when the country’s urge is to maintain the economic growth and FAI expansion in which LGFVs play indispensable roles. While the stable creditworthiness of LGs can potentially underpin LGFVs, the divergence among different LGs and LGFVs is broadening.
Jameson Zuo, FRM
+852 3615 8341
+86 755 83210225
Ke Chen, PhD
+852 3615 8316
Ms. Charley Lui
Direct：+852 3615 8296
RATING SERVICES ENQUIRIES
Mr. Allen Wei
Direct：+852 3615 8324
Date of Relevant Committee: 10-Februray-2022
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