Risk differentiation could deepen as China's local and regional governments (LRGs) more regularly explore international bond markets. The market may start to better differentiate credit quality among Chinese tier-one LRGs (such as provincial-level, municipalities and special planning cities). These tier-one Chinese governments are the only ones allowed to borrow directly.
Chart 1
What's Happening
Since 2021, the city of Shenzhen, and the provinces of Hainan and Guangdong have been frequently issuing offshore LRG renminbi-denominated bonds. Shenzhen and Hainan's offshore issuances are sizable, accounting for 5%-10% of their total annual issuance in the past two years. If the recent years' pattern of issuing all offshore bonds in the second half holds for these three LRGs, more will come this year. Since 2022, LRG offshore issuances have come at slightly higher costs than similar onshore debt, especially in tenors of three years and longer.
These issuances have been mostly for special purpose bonds that are designated for use in infrastructure projects primarily under the LRGs' Green, Blue, Social and Sustainability Finance Framework. Since they are unsecured and have the same repayment sources as general purpose bonds, we see no credit difference between the two types.
Why It Matters
The tapping of offshore markets widens the financing options for China's LRGs . Although the issuances remain more of an exploration by selected LRGs, this channel could provide funding diversification and become cost effective under different interest conditions. Issuance so far have been in offshore renminbi (CNH), given the interest rate advantage, but this could also evolve.
Such issuance also fosters better transparency and communication by LRGs. In compliance with international conventions, the bilingual offering circulars disclose contractual details regarding issue seniority and any security arrangements, which have been absent in their onshore documents. They also include elaboration of local economic, fiscal, debt, and financial conditions, long-term development goals and strategy. This is valuable information for the investor and facilitates better credit evaluation.
What Comes Next
Offshore issuances could lead to better credit differentiation. All 37 eligible LRG issuers are rated 'AAA' domestically, with little differentiation among their credit spreads. Offshore issuances so far have even less pricing differentiation. But this could change if more LRGs come to the offshore market and issue at longer tenors.
In our opinion, tier-one LRGs generally have good to manageable credit standing. We view their credit profiles as largely close or equal to the sovereign, given stable institutional framework and well-balanced fiscal positions. However, there are selected ones that are weaker given their idiosyncratic risks. At the same time, tier-one LRGs have close ties with the central government and equalizing transfers from the central government help narrow the credit variation among them. Under this highly centralize management model, their credit quality would also not exceed that of the sovereign (China; A+/Stable/A-1).
Background In Brief: China LRG Credit Assessment
We evaluate the debt repayment ability of LRGs based on institutional framework assessment and a combination of idiosyncratic risks. For Chinese LRGs, the institutional framework assessment applies across LRGs within the same tier, and weakens as the tiers go lower. We also look at their idiosyncratic risks--local economic prospects, fiscal performance, and debt burdens associated with LRGs' direct borrowing as well as their state-owned enterprises, liquidity conditions, and financial management abilities.
Economic, fiscal conditions and debt burdens are the key differentiating factors for Chinese LRGs and often vary given regions within China are at various stages of development.
Generally, the tier-one governments are able to shift the heavy infrastructure spending to their lower-tier governments (e.g. prefecture cities, counties, and districts). This helps the upper governments to manage their spending needs, leading to relatively balanced fiscal positions and moderate debt burdens. For many tier-one governments, we view their lower-tier LRGs as still having satisfactory repayment ability. For selected weak ones, however, we view the tier-one LRGs as having to assume the contingent responsibility of partially repaying onlent debt to lower tiers, dragging down their credit quality.
Related Research and Criteria
- China Tier-One Local Government Risk Indicators Databook, July 22, 2024
- China Tier-One Local Government Risk Indicators Chartbook, July 22, 2024
- Research Update: China Ratings Affirmed At 'A+/A-1'; Outlook Stable, June 27, 2024
- Institutional Framework Assessment: China Provincial Governments' Capital-Light Framework To Support Fiscal Positions, Aug. 10, 2023
- China's First Offshore Subnational Bond Clears The Way For More Transparent Financing, Oct. 17, 2021
- Institutional Framework Assessment On China's Local Governments Raised On Central Government's Tightening Control, Aug. 29, 2021
- Criteria | Governments | International Public Finance: Methodology For Rating Local And Regional Governments Outside Of The U.S., July 15, 2019
- Criteria | Governments | International Public Finance: Methodology: Rating Non-U.S. Local And Regional Governments Higher Than The Sovereign, Dec. 15, 2014
This report does not constitute a rating action.
| Primary Credit Analyst: | Wenyin Huang, Singapore +65 6216 1052; Wenyin.Huang@spglobal.com |
| Secondary Contacts: | Christopher Yip, Hong Kong + 852 2533 3593; christopher.yip@spglobal.com |
| Ryan Tsang, CFA, Hong Kong + 852 2533 3532; ryan.tsang@spglobal.com | |
| Research Assistant: | Chen Guo, Hong Kong |
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.