HONG KONG, 12 January 2021. Pengyuan International has assigned its long-term global scale foreign-currency issuer credit rating (ICR) of ‘A’ and local-currency ICR of ‘A+’ to the Hebei provincial government, reflecting Hebei’s below average economic development and rapidly growing budgetary revenue, despite of a widening deficit. The outlook of the ratings is stable.
Hebei is a coastal province of China (AA/AA+, Stable) and is part of the North China region. Hebei surrounds Beijing, the national capital and borders the provinces of Liaoning to the northeast and Shanxi to the west. It covers an area of 188,800 square kilometres, accounting for about 2% of China’s land area. The province has a population of 75.9 million at the end of 2019, equivalent to 5.4% of the country’s population. The province has served as an industrial supply base in the country in terms of iron and steel, cement and glass manufacturing.
The regional strategies of China involving Xiong’an New District and Coordinated Development of the Beijing-Tianjin-Hebei Region are benefiting Hebei’s economy. Hebei’s economic performance has been mediocre over the past few years, with its GDP per capita at RMB46,348 (USD6,727) in 2019, merely higher than five of its peers in the country. The iron and steel industry has been the key contributor to the province’s GDP, but the sector has seen several years of capacity cuts and restructuring. We believe this segment has become more resilient and robust than before, as Hebei’s GDP growth was 6.8% in 2019 and 1.5% year on year in the first three quarters of 2020. Since Hebei has not been significantly affected by the coronavirus pandemic and with the supportive national strategies in place, we believe the long-term vision of the province’s economy should be positive.
Hebei has seen an aggravating deficit pressure in recent years. Since the Xiong’an New District strategy was rolled out in 2017, the budgetary expenditure of Hebei has started increasing rapidly, with a widening deficit subsequently. To cushion the impact of the coronavirus pandemic, the province’s budgetary expenditure has remained intense in 2020. However, the general public budgetary revenue of the province has been hampered by the pandemic with only 0.2% year on year uptick in the first three quarters. As a result, the budgetary balance to revenue ratio of the province is expected to plunge to -32% this year, pointing to an all-time high deficit level of the province.
Hebei’s Debt burden is not heavy yet, but it is exacerbating rapidly. We estimate the province had registered a moderate debt to revenue ratio of 233% at the end of 2019. However, the province must leverage on a vast amount of additional borrowing to meet its widening deficit in 2020. The central government has lifted the province’s direct debt ceiling by a large degree in recent years to boost the province’s capacity of raising debts. Hebei’s debt ceiling has seen a year-on-year increase of 20% and more than 30% in 2019 and 2020 respectively. Therefore, we project the debt to revenue ratio of Hebei to rise to 278% this year.
The province’s liquidity condition is well bolstered by the central government’s fiscal help and measures. The provincial government possesses a decent fiscal deposit of RMB167.6 billion at the end of 2019, which has remained steady over the previous years. In addition, the province’s strong financing capability has been supported by the central government, meaning that the provincial government’s liquidity source should be sufficient to meet its ballooning deficit and maturing debts over the next two years.
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Mr. Allen Wei
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Date of Relevant Rating Committee: 21-Dec-2020
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