articles Ratings /ratings/en/research/articles/240613-china-local-governments-the-slow-road-to-stabilization-13144916 content esgSubNav
In This List
COMMENTS

China Local Governments: The Slow Road To Stabilization

COMMENTS

Instant Insights: Key Takeaways From Our Research

COMMENTS

Investment And Talent Are The Keys To Unlocking AI's Potential

COMMENTS

Project Finance: Why Ratings Above The Sovereign Are Uncommon

COMMENTS

Your Three Minutes In CEE Sovereign Ratings: The Economic Nexus Between CEE Countries And China


China Local Governments: The Slow Road To Stabilization

What's Changed

China's economic transformation is pulling LRGs in opposite directions. Protracted property weakness, looming deflation risk, and sustained tax relief weigh on the sector's revenue generation into 2024. But steady industrial upgrading and a gradual consumption revival are also anchoring revenue growth.

S&P Global Ratings believes China's LRGs are poised for another difficult year. After 2024, however, we assume the sector will slowly get their finances in order, with a mild recovery in 2025 putting governments on a gradual path to fiscal health in three to five years.

We expect LRGs' revenue from land sales could drop by another 10% or more in 2024, before stabilizing. However, LRGs' expenses for preparing land for sale (land consolidation, the clearing of old homes, etc.) will also decline. Industrial land sales should perform relatively better, as China's ongoing industrial investment will support demand for such land.

The unused LRG bond quota could limit the room for further issuance of special refinancing bonds (SRBs). Governments can use SRBs to swap maturing hidden debt, and address other payment commitments.

We do not believe the SRB program is meant to deleverage local government financial vehicles (LGFVs). Moreover, after issuing about Chinese renminbi (RMB) 1.4 trillion of SRBs, LRGs' unused bond issuance quota dropped by half in 2023.

LRGs collectively held RMB1.4 trillion of such quota at the end of 2023. While clearly that is a big number, just as clearly it is not enough to settle the vast debts held by the LGFVs.

What's Next

The trajectory of LRGs' fiscal recovery remains unchanged. We assume the finances of local governments will stabilize as the Chinese property sector eventually bottoms, and governments stay disciplined on spending. That said, immediate revenue pressures and continued spending intensity could delay China LRGs' fiscal consolidation by another year.

We expect ongoing structural shifts to reshape spending priorities in the China LRG sector. Developed regions will likely continue to undertake fiscally expansive measures to support economic growth. The "Three Major Projects" initiative will also focus on China's largest cities, where underlying supply-demand fundamentals for basic housing and infrastructure are generally stronger.

The Three Major Projects is aimed at tackling housing problems in large cities, and could involve up to RMB3 trillion-RMB4 trillion in policy-driven land and property development over 2024-2025 (see "China LGFVs' Bigger Housing Role: Risk Control Matters," March 27, 2024.

However, more indebted regions will experience greater constraints around financing for new projects, in our opinion. Such regions will come under increased pressure to deleverage.

The debt levels of Chinese LRGs will likely keep rising in 2024. LRGs' new borrowing quota remains sufficient to fund public investment, as China remains cautious about exiting fiscal expansionary measures too abruptly. However, we expect LRGs to book revenue gains beyond 2024. This will help stabilize debt pressures.

The deleveraging effort will gradually force Chinese LRGs to distance themselves from SOEs, raising governments' selectivity in providing support for distressed entities. The growing commercialization of policy SOEs should also help LRGs mitigate long-term debt risk.

Key Risks

Material spending increases could derail LRGs' deleveraging effort. If China's property sector deteriorates beyond our current expectation, and LRGs ramp up spending to support initiatives such as the Three Major Projects, this would result in larger deficits. Already high debt burdens would swell even higher.

Likewise, should LRGs be pulled in to pay for an aggressive deleveraging of the LGFV sector, that could cause another spike in on-budget debt for LRGs. In an unlikely scenario, this could include the recognition by Chinese LRGs of large volumes of SOE commercial debt as hidden debt, possibly prompting governments to breach unused bond quotas to swap out LGFV debt.

Lengthy delays in LRGs' revenue recovery would also hamper fiscal stabilization. If China continues to roll out aggressive tax relief programs to support economic development, or continued property woes further squeeze fiscal resources, LRGs' debt control effort could be compromised. More tail risk would come to light.

Chart 1

image

Chart 2

image

Chart 3

image

Chart 4

image

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Yunbang Xu, Hong Kong (852) 9860-4469;
yunbang.xu@spglobal.com
Secondary Contacts:Christopher Yip, Hong Kong + 852 2533 3593;
christopher.yip@spglobal.com
Wenyin Huang, Singapore +65 6216 1052;
Wenyin.Huang@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.

 

Create a free account to unlock the article.

Gain access to exclusive research, events and more.

Already have an account?    Sign in