Creditworthiness of Chinese Local Governments in 2021

A positive outlook for an economic recovery of China in 2021, with the GDP growth in many regions expected to surpass 8%, leads to a cautiously optimistic view of the creditworthiness of Chinese local governments in 2021.

Summary

A positive outlook for an economic recovery of China is set for 2021, depicted by a GDP growth rate surpassing 8% registered by many provincial regions in 2021. Since China has well contained the coronavirus pandemic, coupled with the fiscal stimulus, the country’s economy recovered rapidly with more than half of provincial regions reported a GDP growth of over 3% in 2020. Although the coronavirus confirmed cases increased marginally at the beginning of 2021, the impact should be modest with the government’s draconian measures  and strict control in place. We expect the reviving consumption will lead to vibrant economic growth in some wealthy provincial regions this year. Also, as provinces such as Guizhou, Yunnan and Jiangxi have successfully cultivated their fast growing clusters of industries and sustainable progress pattern, they should manage to record strong growth in 2021. However, the economic growth in regions  such as Heilongjiang, Liaoning and Inner Mongolia is likely to fare worse than the average level in 2021 due to the revival in the number of confirmed coronavirus cases and the ingrained structural defects in their economies.

Deficit level of local governments (LGs) in China will generally stabilise in 2021 when the proactive fiscal strategy is toned down and budgetary revenue increases. Local governments’ deficit surged in 2020 as a result of the intensified budgetary expenditure. Since the coronavirus pandemic has subsided and the country’s economic growth has got back on track, the fiscal expansion should no longer be an urgent and imperative task for most local governments in 2021. On top of that, we believe the general public budgetary revenue of most  governments will grow nicely and the land sales will not be significantly dampened by the new policies on debt financing of the real estate industry. Moreover, we believe the reinforced fiscal help from the central government will not abate sharply but will likely to gradually resume normalcy in 2021.

LGs’ debt burden is expected to remain heavy with wide gaps depicted. We estimate the average debt-to-revenue ratio of provincial governments of China to have risen by 15 percentage point in 2020. Gaps were widened quickly among local government’s debt level due to their uneven impact by the pandemic and various extents of fiscal stimulus. Based on our analysis, the debt-to-revenue ratio of Shaanxi province and Tianjin city exceeded 400% whereas that of Guangdong, Tibet and Beijing was below 150% by the end of 2020. We believe most local governments will be more conscientious with a focus on increasing their debt when their fiscal expansion slows in 2021.

Outlook of LGs’ creditworthiness remains stable in 2021. Most LGs will have decent liquidity condition albeit the financing channels for LGs will not be as loose as they were in 2020. Some credit events of a few state-owned enterprises and local government financing vehicles last year have struck a nerve in the financial market. The normalising fiscal policies and financing condition will expose the risk in a few lower-level local governments with vulnerable credit profile. As such, we believe the creditworthiness of local governments will generally remain stable but become more dispersed this year. The tail risk appears to be a concern.