(Repeat for additional subscribers)
Jan 3 (The following statement was released by the rating agency)
China's public debt audit shows the continued growth of local and regional government (LRG)
debt and highlights the importance of LRG reforms announced in November, Fitch Ratings says. The
level of debt disclosed does not materially differ from Fitch's estimates when the agency
downgraded China's sovereign Local-Currency Long-Term IDR to 'A+'/Stable from
'AA-'/Negative in April 2013.
The Chinese National Audit Office (CNAO) said on Monday that total LRG debt
stood at CNY17.8trn (USD2.9trn) as of June last year. This is in line with
Fitch's CNY18.5trn estimate for H113, which included an estimate of at least
CNY4trn in credit extended to LRGs via shadow financing channels. The CNAO's
figure for total direct LRG and LRG-guaranteed debt of CNY13.5trn (CNY12.1trn by
end-2012) is also broadly consistent with our end-2012 estimate of CNY12.8trn,
or 23%-24% of GDP.
The CNAO's audit improves transparency, which has been a key weakness for the
Chinese LRG sector. Routine provision of data on aggregate LRG debt and other
key metrics would be a major step towards addressing this weakness.
Nevertheless, the audit confirms that LRG debt is still rising, and the
associated risks remain. The 63% increase in LRG debt since the previous audit
at end-2010 outpaced the 40% cumulative GDP growth in the same period. The
rising debt of sub-national governments was a key reason why Fitch downgraded
China's sovereign Local-Currency IDR in April. Further growth in government debt
could eventually exert pressure on the sovereign credit profile.
The audit therefore highlights the importance of LRG reforms announced in
November. These included a proposed change in how public officials' performance
is evaluated, and a more transparent and efficiently regulated financing system.
Effective implementation of these reforms could improve fiscal transparency and
overall budget management, which would be credit positive for Chinese LRGs. This
could in turn reduce the risks to financial stability and the sovereign credit
profile associated with recent rapid credit growth and use of the shadow banking
We expect Chinese LRG budgetary performance to remain stable over the near-term,
as economic growth, although slowing, remains strong (we forecast 7% growth in
2014), and revenues solid. Fitch expects revenue transfers from central
government would be likely to smooth over any short-term volatility in
debt-servicing, although this reinforces the connection between LRGs and the
sovereign credit profile.
However, LRGs do face headwinds from slowing growth, structural tax reform,
rising social expenditures and large indirect debt. Annual debt growth rates
remain higher among lower-tier LRGs, which have less financial resources and
more spending responsibilities under the current institutional framework in
China. This makes them more likely to fill the funding gap by debt financing.
According to the audit results, around one third of LRG debt is serviced by
sales proceeds of land use rights. Lower tier LRGs especially could be exposed
to property market volatility.
And the growth of shadow financing in recent years could increase the interest
burden and refinancing risk for LRGs. The announcement by China's National
Development and Reform Commission that LRGs could issue new debt to complete
projects that are not yet generating expected revenues appears to acknowledge
the widespread rolling over of LRG debt, which may in turn increase refinancing
risk in the future.