Pengyuan International Assigns ‘A+’ Rating to the Provincial Government of Hubei; Outlook Stable


14 Jul 2022

    HONG KONG, 14 July 2022. Pengyuan International has assigned the global scale long-term foreign-currency and local currency issuer credit rating (ICR) of ‘A+’ to the Hubei provincial government. The ICR reflects the province’s robust economy, solid budgetary revenue, and healthy liquidity, as well as its increasing debt load. The outlook is stable.

    Hubei is located in the central part of China (AA, stable), bordering Anhui, Jiangxi, Hunan, Chongqing, and Henan provinces. The province has 13 prefecture-level regions, with Wuhan as its capital. As of the end of 2021, Hubei registered a population of 58.3 million.

    Credit Strengths

    Hubei’s economy, as the hardest-hit area by the coronavirus epidemic in 2020, has shown strong resilience in its strong rebound recovery in 2021. The province’s GDP exceeded RMB5 trillion in 2021, up 12.9% year on year, outpacing Fujian and regaining seventh place in terms of the economic scale in China. Despite sporadic epidemic outbreaks across the country in 2022, Hubei’s economic development has witnessed great momentum, including a notable 20% year-on-year increase in its fixed-assets investment in the first quarter of 2022. In addition, with its advantage of industrial foundation, Hubei has been actively transforming its pillar industries into high-tech manufacturing. Therefore, we have a positive outlook for the province’s economic development this year and expect its economic growth rate to be 6.8% for the entire year.

    Hubei’s budgetary revenue has been steadily increasing in recent years, even in 2020, when the central government’s fiscal support significantly underpinned the province’s revenue during the epidemic. In 2021, Hubei’s budgetary revenue amounted to RMB1,112 billion and its budgetary revenue per capita was RMB19,077, which was higher than many of its counterparts in the country. This is mainly benefited by its reasonable revenue structure and stable transfer and refund payments from the central government. Furthermore, the solid budgetary strength of Hubei has consolidated the province’s liquidity position and alleviated its financial stress to a great extent, in our view.

    Credit Weaknesses

    Despite a consistent uptrend in the province’s overall revenue, land sales stagnated between 2019 and 2020 in Hubei; in the meantime, government spending continues to expand, particularly significantly in 2020 to support the epidemic prevention and control measures. As a result, Hubei’s budgetary expenditure growth gradually exceeded its revenue growth, and the province’s fiscal imbalance has been exacerbated in recent years. Even if increased refund and transfer payments from the central government are expected to partially offset the expanding government expenditure by local governments, we expect Hubei’s fiscal deficit will grow in 2022 under the national proactive fiscal policy, with its budgetary balance to revenue ratio decreasing to below -20% by the end of 2022, in according to our estimates.

    We assess Hubei’s debt burden to be relatively heavy at the provincial-level in the country, with its debt-to-revenue and debt-to-GDP ratios in 2021 estimated to be 205% and 46%, respectively. Given the province’s ongoing fiscal expansion, we believe its debt scale will continue to rise by the end of 2022, indicating that the province will face increasing pressure to service its debt and interest payments in the next few years.  Nonetheless, if the province’s economy continues its rapid growth, the government debt growth will remain manageable and sustainable for years to come.

    RATING OUTLOOK

    The stable outlook of Hubei reflects our expectations that China’s credit profile will remain stable and Hubei’s credit profile will continue to be solid over the next 12 to 24 months.

    We would consider downgrading Hubei’s issuer credit rating if 1) there is a rating downgrade action by Pengyuan on China; and/or 2) the province’s budgetary balance continues to deteriorate.

    We would consider upgrading Hubei’s issuer credit rating if the province’s debt burden reduces materially.

    Note: Ratings mentioned in this press release are unsolicited.

    ANALYST CONTACTS

    Primary Analyst

    Jameson Zuo, FRM

    +852 3615 8341

    jameson.zuo@pyrating.com

    Secondary Analyst

    Siqi Lin

    +86 755 83210225

    siqi.lin@pyrating.com

    Committee Chair

    Ke Chen, PhD

    +852 3615 8316

    ke.chen@pyrating.com

    Media Contact

    media@pyrating.com

    Rating Services Contact

    Allen Wei

    +852 3615 8324

    allen.wei@pyrating.com

    Date of Relevant Rating Committee: 30-June-2022

    Additional information is available on www.pyrating.com

    Related Criteria

    Chinese Local Government Rating Criteria (29 June 2021)

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