Bond Market News

In a report published by Fitch last Thursday, it expects greater divergence in the credit profiles of Chinese local governments in 2021. While the report did not mention specific names, it said that fiscal performance deteriorated in 2020 with fourteen provinces seeing a decrease in operating revenues (tax and non-tax) despite China’s positive GDP growth for the year. On the other hand, expenses for the local governments were rigid with only four provinces managing to cut their operating expenditure. While this led to a widening gap in the local governments’ operating balances, a metric that is an important part of Fitch’s rating methodology for these entities, the gap is expected to be plugged by central bank support in the form of transfers. For 2020, Fitch said that central bank transfers grew by 12.8% to CNY 8.4tn ($1.29tn), the fastest increase since 2012. Fitch added that the transfers covered 75% of operating deficits, based on the 16 provinces that disclosed the number for 2020. The gap was also plugged with debt as new bond issues from local governments grew by 20% last year, the fastest growth since 2015. Fitch does not expect the increased issuance to continue this year. Fitch expects leverage to have temporarily deteriorated for all 29 regions with the weaker provinces in the west and north-east worst affected and the eastern provinces to maintain stable leverage. The rating agency maintains a stable outlook on the local governments, given the expected economic recovery and continued government support.

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