HONG KONG (S&P Global Ratings) April 25, 2022--Shanghai's solid economic profile and strong fiscal performance will shield it from the COVID-19 lockdown that has paralyzed the city and caused widespread disruption.
"Shanghai's solid economy and prudent fiscal discipline will help the city government maintain its robust fiscal revenue base and healthy fiscal position," said S&P Global Ratings credit analyst Susan Chu. "We expect operations to quickly resume once the lockdown has eased."
Shanghai's GDP grew at an average of 7% over 2017-2021, thanks to its diversified economic base, which is home to national leaders in financial services, real estate, retail/wholesale, commerce, and advanced manufacturing. The city's economic diversity and growth have translated into solid household income growth, which continues to support a consumption-driven local economy.
On March 28, 2022, under China's zero-tolerance of COVID-19 cases, Shanghai authorities locked down the 25 million-strong population, and applied strict containment measures. These measures drew immediate market attention to heightening supply-chain disruptions, especially in industrial segments such as auto production and container loading where Shanghai serves as the main hub in China. Officials have encouraged companies to restart production by using so-called closed loop systems in which workers live at their factories. However, regaining production levels will be gradual.
During the first wave of COVID-19 in 2020, Shanghai did not resort to heavy containment measures. This suggests the government can maintain its resilience in the face of fluctuations. The Shanghai government (or Shanghai (Municipality of) reported a deficit ratio (namely, the balance after capital account over total revenues) of 6% in 2020. Although weakening, this is still a modest level. The ratio quickly recovered to 1% in 2021 and has averaged 2% over 2017-2021 on consistently growing fiscal revenues.
Shanghai's recovery may be delayed, however, as happened in Wuhan, which was locked down from January to April 2020. Wuhan's containment severely disrupted activity and caused its GDP to contract by about 40% in the first quarter of 2020. China's central government did, however, provide effective and exceptional support. This included large fiscal transfers to sponsor Wuhan's public finance. These measures allowed the city to quickly resume local activity, and its GDP to regain its pre-COVID level by mid-2020. Wuhan has a population of 13 million, and is the ninth largest city in China according to GDP.
Despite the lockdown, the Wuhan government's revenue still grew in 2020, largely supported by the transfer from central government. Its deficit ratio temporarily widened to 23% that year, compared with a range of 12%-19% for 2017-2019, before rebounding to about 10% in 2021. The government is fiscally under the administration of the Hubei government.
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"The Shanghai government controls a wide range of highly liquid or valuable assets, which will provide additional buffers if lockdowns are prolonged or tightened," said Ms. Chu.
The municipality controls large liquid assets to cover its debt obligations. We estimate its debt maturity at Chinese renminbi (RMB) 61 billion for 2022 and RMB83 billion for 2023. In comparison, the government's deposits in the region translate to 26x the debt maturity in 2023, while the average level of its domestic peers is 10x (see "China Local Governments' Escalating Issuance May Finally Be Testing Liquidity," published March 1, 2022.)
The secondary effects are yet to be determined. One downside scenario is that the Shanghai government will aim for a more aggressive fiscal policy and leverage debt finance to sponsor growth. Chinese authorities appear determined to maintain GDP growth of 5.5% for 2022. China reported GDP growth of 4.8% in the first quarter of 2022, but a few macro factors indicate slower growth or even a decline in China's GDP starting from March 2022.
"By resorting to aggressive fiscal policies, Shanghai's fiscal results and its debt level would deteriorate," said Ms. Chu.
Shanghai's debt ratio (namely, tax-supported debt over consolidated operating revenues) jumped by 20% in 2020 following its adoption of more fiscal stimulus and additional borrowings. We estimate its debt ratio to be at approximately 180% as of the end of 2021.
If Shanghai continues to tolerate a deficit ratio of more than 30% for the next two to three years or if it leverages key state-owned enterprises for extensive capital expenditure, it risks incurring a very high debt ratio, which could well exceed 240%. This scenario, however, appears remote as the Shanghai government operates in an institutional framework under the tightening control of the central government.
Shanghai is one of the four municipalities or 31 province-level regions in China. The city has the largest GDP scale (US$630 billion in 2021) and the second-highest GDP per capita (at US$26,946 in 2021). The Shanghai government administers 16 district governments in the region.
Related Research
- China Tech Braces For Short, Sharp Lockdown Effects From Shanghai, April 21, 2022
- Shanghai Lockdown Could Hit Some Banks Hard, April 19, 2022
- COVID Curbs Are Adding Downside Risk To China's Auto Sales, April 14, 2022
- China Local Governments' Escalating Issuance May Finally Be Testing Liquidity, March 1, 2022
- Chinese Tier-Two Local Government Risk Indicators, Nov. 28, 2021
- China Provincial Governments' Risk Indicators, June 16, 2021
Editor: Lex Hall
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analysts: | Susan Chu, Hong Kong (852) 2912-3055; susan.chu@spglobal.com |
| Jocelyn Huang, Hong Kong 25328079; jocelyn.huang@spglobal.com | |
| Research Assistant: | Yoyo Yin, Hong Kong |
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