HONG KONG, 24 October 2019. Pengyuan International has assigned the global scale foreign-currency issuer credit rating (ICR) and local-currency ICR to five provincial level local governments (LG) in China, including the provinces of Guangdong, Zhejiang, Sichuan, Shanxi and Guizhou. The outlooks for these ratings are stable. Relative ICRs are as following:


Local Government

Foreign-currency ICR

Local-currency ICR

Guangdong

AA-

AA

Zhejiang

AA-

AA

Sichuan

A+

AA-

Shanxi

A+

AA-

Guizhou

A

A+

 

China’s administrative system mainly involves four-level of governments: central government, provincial-level governments, prefecture-level city governments, and county-level governments. Counties are then further divided into townships and villages. In China, provincial level LGs are highest level local governments that are under central government’s direct supervision and their credit profiles are closely linked to China’s sovereign rating (AA/AA+, stable), in our view. We examine Chinese LGs’ creditworthiness on five aspects: economic strength, budgetary strength, debt burden, liquidity, governance and financial management. Each of these five major credit factors is assessed on relative basis by comparing a particular LG’s credit strength to its relevant peer group, and then a weighted average score is derived to determine the LG’s credit linkage with its higher-level government. Some additional adjustment may be applied to address a unique credit characteristic of a LG.


Given China’s centralized governing system, we believe Chinese central government would generally keep the creditworthiness of the provincial level LGs within a closer distance to its own creditworthiness. Even though the central government has offloaded most of economic and social responsibilities down to the LGs over the last decades, it still deeply influences the LGs’ economics and financials through a tax-sharing and reallocation system. In addition, the appointment and promotion of the local government officials are very much centralized in China through a vertically managed system controlled by the ruling party.


In our view, the provincial level LGs’ credit ratings are no more than three notches below China’s sovereign rating, with only a few provinces and centrally-supervised municipalities outperforming the peers and establishing their credit profiles to be one notch away from the sovereign rating. We believe most of the provincial level LGs’ credit ratings will fall into two to three notches below the sovereign rating given their current credit strength.

 

CREDIT SUMMARY

Our ratings on Guangdong provincial government reflect the province’s outstanding economic performance, moderate budgetary strength, relatively small debt burden and abundant liquidity. Guangdong’s rating also benefited from its business-friendly environment and continuous net inflow of population. However, the provincial government’s budgetary strength is not as strong as the local economy, its budgetary balance performance, revenue per capita and revenue growth are generally in line with the national average level.


Zhejiang provincial government’s ratings reflect the province’s vibrant and strong economy, light debt burden, superior budgetary performance and adequate liquidity. The province basically performs better than average in every aspect in our assessment, especially the government’s sharp and leading revenue growth largely enhances its budgetary strength and ability to undertake its debt burden. In essence, the excellent performance of the province has been mainly fueled by its strong economic foundation.


Our ratings on Sichuan provincial government reflect the province’s average economic strength, middling budgetary performance, moderate debt burden and weak liquidity. Sichuan is one of the most economically developed provinces in western China, with decent provincial GDP and high GDP growth. However, due to Sichuan’s large population, its GDP per capita is below the national average. Besides, Sichuan general government’s liquidity condition is at lower middle range, and we consider its debt and liquidity management to be weaker than most of its peers as a few risk events of LGFVs occurred in Sichuan in the past two years.


Shanxi provincial government’s ratings reflect the province’s below-average economic strength, average budgetary performance, as well as its lighter debt burden but tighter liquidity compared to most of its peers. The province’s economy is highly reliant on cyclical resource and material industries, so its economic strength is weaker than others. But the good point is the government has not loaded up much on debt so its debt burden and liquidity are decent. The budgetary strength of the Shanxi general government is average, mainly supported by its outperforming revenue growth in recent years.


Our ratings on Guizhou provincial government reflect the province’s economic weakness, marginally above-average budgetary performance, heavy debt burden and greater liquidity pressure than most of its peers. The province is an economic late bloomer and has a weak foundation, and currently relies greatly on investment to stimulate its economy, which lead to the government being extremely aggressive on borrowing and debt-ridden nowadays. The large debt has dimed the province’s liquidity and a number of defaults on non-standard products issued by lower-tier LGFVs in the recent two years sounded alarm bells.

 

ANALYSTS CONTACTMEDIA CONTACTOTHER ENQUIRIES

Primary Analyst

Tony Tang

+852 3615 8278

tony.tang@pyrating.com

 

Secondary Analyst

Jameson Zuo

+852 3615 8341

jameson.zuo@pyrating.com

 

Secondary Analyst

Lisa Hu

+86 755 8321 0225

li.hu@pyrating.com

 

Committee Chair

Yun Tang

+852 3615 8297

yun.tang@pyrating.com

media@pyrating.comcontact@pyrating.com

Date of Relevant Rating Committee: 10-Oct-2019

Additional information is available on www.pyrating.com


Related Criteria

Chinese Local Government Rating Criteria (28 June 2019)


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