Fitch: Wide Geographical and Hierarchical Disparity in Creditworthiness for Chinese LRGs

Tue May 7, 2013 8:00pm EDT

Link to Fitch Ratings' Report: Evaluating the Credit Quality of Chinese LRGsHONG KONG, May 07 (Fitch) Fitch Ratings, in assessing Chinese local and regional governments' (LRGs) ratings, says their ratings are expected to have a wide geographical and hierarchical disparity. In a special report published today, the agency says the general rating range of Chinese LRGs is expected to be quite wide - from the 'A' category to non-investment-grade - with likely higher ratings at provincial or prefecture level and lower ratings among counties and townships. Fitch will adopt a globally consistent "building-block" approach in assessing the credit quality of Chinese LRGs. Five major rating factors are assessed - the institutional framework, socio-economic profile, budgetary performance, debt profile, and governance and administration. The institutional framework for China's subnationals is classified by Fitch as "neutral", an intermediate position in the global rated universe. The rationale for this assessment is the generally stable regulatory regime, adequate control by the sovereign, a moderately transparent revenue-transfer mechanism, and limited fiscal flexibility. GDP per capita of Chinese provincial administrations ranges from USD3,100 to USD15,300, which reflects a considerably varied degree of economic development. Composition of the economy and demographic structure also vary widely, which influences revenue-generation and spending pressure. Chinese LRG deficits ranging from 2%-3% of fiscal revenue are still modest in Fitch's rated universe, despite rising from an aggregate CNY200bn in 2011 to CNY250bn in 2012. LRGs in coastal regions generally have a more robust budgetary performance due to stronger and more diversified revenues. Those in western regions usually have more concentrated revenue sources such as real estate and natural resources, and also rely heavily on central government transfer. Chinese LRGs' transparency is a key weakness. Some balance-sheet items, such as total LRG-related debt, are generally not publicly available. Details and reporting format consistency are also uneven across sub-provincial governments. LRGs have limited direct debt, but indirect debt incurred by local government financing platforms (LGFPs) is large. China's National Audit Office (NAO) identified CNY10.7trn in LRG debt at end-2010, and Fitch estimates that this will have risen to CNY12.8trn by end-2012. Adding borrowings raised through shadow-banking channels could bring the figure closer to CNY15trn-CNY18trn, as cited by an official at the NAO in March 2013. LRGs face headwinds from slowing economic growth in China, structural tax reform, rising social expenditures and large indirect debt. Nevertheless, Fitch expects performance to remain stable over the near term, in keeping with the outlook for economic growth and continued solid revenues. The agency's view is also reinforced by a consistently strong revenue transfer from central government which would be likely to smooth over any short-term volatility in debt-servicing. The report, Evaluating the Creditworthiness of Chinese LRGs - Wide Geographical and Hierarchical Disparity, is available on www.fitchratings.com or by clicking on the link above. Contact: Terry Gao Associate Director +852 2263 9972 Fitch (Hong Kong) Limited 2801, Tower Two, Lippo Centre 89 Queensway, Hong Kong Fernando Mayorga Managing Director +34 93 323 8400 Fitch Ratings Espana. S.A.U. Paseo de Gracia, 85, Barcelona 08008 Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.