PENGYUAN INTERNATIONAL

HONG KONG, 17 Jan 2018. Pengyuan International has released a research report, titled “China’s Turning To “Tough Gradualism” In Discipling Local Government Borrowing Foretells Higher Risk of LGFV Default”. This research report is accessible via the link: http://www.pyrating.com/CreditResearch

The first default on public bond of local government financing vehicles in China (LGFVs) could possibly happen in 2018, although the odds are still less than 50% according to a report published today by Pengyuan International titled “China’s Turning To ‘Tough Gradualism’ In Discipling Local Government Borrowing Foretells Higher Risk of LGFV Default”.

The central government of China launched recently a three-year critical battle against financial risks. Allowing LGFV default (“shock therapy”) may become a policy choice to dispel investor belief in implicit government support to LGFVs and thus help tame hidden local government borrowing, which occurred primarily through LGFVs. 

“We believe Chinese government is turning to ‘tough gradualism’ rather than “shock therapy” in disciplining local government borrowing”, said Liang Zhong, analyst of Pengyuan International, “in another word, the central government is likely to tighten relevant discipline gradually, bearing in mind the needs to balance between achieving growth target and securing financial stability”. 

The report argues that the “tough gradualist approach” means some type of credit events could happen before the others. For instance, the first default on public bond by LGFV sector in onshore market is likely to precede LGFV default on public bond in offshore.

As the risk of LGFV default rises, greater scrutiny of LGFV creditworthiness becomes increasingly necessary, including scrutinizing provincial economic and fiscal data according to the report.

“If China’s central government adheres to ‘tough gradualism’, namely tightening discipline steadily over local government borrowing, there it is good chance that the once relentless hidden LGT borrowing could be tamed markedly within three years.” Said Mr. Zhong.


 
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+852 3596 6140
liang.zhong@pyrating.com

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