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China Is Strengthening the Integrated Control of Public Debt

19 Nov 2024

The framework for managing local government debt in China has undergone a significant shift. In July 2023, the central government introduced the "package of debt resolution schemes" aimed at relieving the local government’s hidden debt pressure, which is followed by the substantial debt restructuring package of RMB12 trillion unveiled in November 2024. These approaches signify a notable evolution in China's government debt management strategy, moving from a stance where the central government refrained from financial assistance or underwriting local government debts to a more involved approach where it actively engages with local governments in coordinating debt management. This report outlines the evolution of China's public debt management model and discusses the potential impacts and challenges of China's new debt resolution policies.

Shantytown 2.0, destocking to improve the property market supply demand dynamics

21 Oct 2024

On 17 October 2024, China's Ministry of Housing and Urban-Rural Development (MOHURD) announced a series of new policies to support the property market. Followed the Politburo Standing Committee's advocates, these measures focus on initiatives such as monetized resettlement housing and ensuring the completion of unfinished projects. The Chinese government plans to launch one million urban village and housing renovations projects, in conjunction with loans and tax incentives. These actions aim to boost housing demand, reduce inventory, and restore market confidence, continuing efforts seen in previous resettlement programs in China from 2015-2018.

Examining the Excess Yield Spread of Chinese Local Government Financing Vehicle Offshore Bonds

10 Oct 2024

Since the Fed’s rate hikes in 2022, the yields on offshore Chinese Local Government Financing Vehicle (LGFV) bonds have surged, reaching 5.7% on average by August 2024, outpacing their onshore counterparts. Facing tighter domestic financing conditions, LGFVs have increasingly resort to overseas markets, with offshore LGFV bonds issuance jumping 62% year-on-year in the first eight months of 2024. Analysis shows a persistent yield premium for offshore LGFV bonds compared to onshore, attributed to differences in investor risk preferences, cross-border funding costs, and credit information availability. Despite these challenges, the offshore LGFV bonds market is expected to mature in further, with long-term forecasts predicting a gradual narrowing of the yield gap between onshore and offshore.

Implicationsof China’s New Fiscal Stimulus Package and What to Expect Next

17 Oct 2024

On October 12th, the Ministry of Finance of China announced a new fiscal policy package aimed at bolstering economic growth, managing debt risks, and shifting focus towards strengthening the real economy and promoting domestic demand. The package focuses on addressing local governments' hidden debts by raising the debt ceiling to replace off-balance-sheet debts, reducing financial strain and enhancing liquidity. This move is seen as crucial for future fiscal expansion, allowing for increased borrowing and direct debt management. The central government's leverage ratio is expected to rise to support these efforts. Additionally, the package targets revitalizing the property market, supporting key demographics, and reinforcing state-owned banks' capital.

China offshore bond market 2024 first half review and second half outlook

14 Aug 2024

The total Chinese offshore bond issuances reached USD 104.4 billion in the first half of 2024, representing a 3% increase year-on-year despite high China-US interest rate spread. The Local Government Financing Vehicle (LGFV) sector led the way with a 49% rise in issuance, while other sectors, particularly property developers, saw declines. Convertible bond issuance by Chinese internet companies surged, totaling USD 70 billion in May. Dim Sum Bonds and Panda Bonds also grew significantly, with 23% and 54% increases, respectively. Looking ahead, expected U.S. Federal Reserve rate cuts may drive more funds into China's offshore bond market, supporting further growth.

China's 'Off-Balance-Sheet Public Debt’ Expansion Slows, Yet Lingering Concerns Persist

12 Aug 2024

By the end of 2023, the total interest-bearing debt of LGFVs （Local Government Financing Vehicle) was estimated at RMB 65 trillion, with the growth rate declining to 8%, reflecting the impact of government debt consolidation policies. Despite this slowdown, the report highlights ongoing concerns, including widening regional disparities and an increase in short-term debt, particularly at the county level. These trends could exacerbate liquidity pressures and create asset-liability mismatches. While lower interest rates have eased some debt servicing pressures, many LGFVs continue to rely on additional borrowing to meet obligations. The report emphasizes the need for ongoing monitoring and effective policy implementation to manage these emerging risks.

Hands on the Wheel: China Reveals the Playbook for the Next Five Years

09 Aug 2024

The 20th Central Committee of the Communist Party of China held its third plenum in Beijing from July 15 to 18, 2024, where significant reform initiatives were introduced. These reforms, outlined in the newly adopted "Resolution," aim to enhance China's economic modernization by 2029. Key areas of focus include strengthening state-owned enterprises, supporting private sector growth, fostering new industries, and advancing fiscal and taxation reform. The plenum also emphasized the importance of improving government debt management, reshaping the monetary policy framework, easing real estate regulations, and enhancing China's engagement with the global economy. These measures are expected to play a critical role in shaping China's economic future over the next five years.

New Commentary on the Performance of the Revenue Cash Flow Forecasting Model for Daily Revenue Obligations (DROs) and Daily Revenue Portfolios (DRPs)

23 Jul 2024

HONG KONG, 23 July 2024. CSPI Ratings has released one commentary, titled " June 2024: Back-testing on the Revenue Cash Flow Forecasting Model for Daily Revenue Obligations (DROs) and Daily Revenue Portfolios (DRPs)". This study assesses the predictive accuracy of CSPI Ratings' Revenue Cash Flow Forecasting Model through out-of-sample and out-of-time back-testing for May and June 2024. The commentary emphasizes the model's strong predictive abilities, demonstrated by high R² values (over 82%) and low prediction errors (1.04% in May, 0.55% in June) throughout the DRO portfolio. Although the model consistently performs well, it exhibits varying levels of accuracy across different sectors. This commentary also forecasts July 2024 revenue cash flows for the DRO portfolio and for each sector. These predictions will be compared with actual values in our forthcoming report. These out-of-sample forecasts will provide essential insights into the performance of our forecasting model and the behavior of this asset class, ultimately contributing to enhanced capital market efficiency.

CFA Features CSPI Ratings ‘Credit Commentary on China’s Public Finance Landscape

01 Jul 2024

On 1 July 2024, CSPI Ratings is pleased to see that our perspectives on Chinese public finance landscape, as discussed in "Non-rating Action Commentary: China Is Reshaping Its Public Debt Structure," have been recommended by the CFA (Chartered Financial Analyst) Institute.

Global Investors: Foreign Investment Fund of Siam Commercial Bank Visits CSCI Pengyuan

07 Jun 2024

May 31 2024, Shanghai, China. The Foreign Investment Fund of Siam Commercial Bank (SCB) visited the Shanghai Branch of CSCI Pengyuan to exchange views about China’s credit landscape.

New Research on the Performance of the Revenue Cash Flow Forecasting Model for Daily Revenue Obligations (DROs) and Daily Revenue Portfolios (DRPs)

30 May 2024

HONG KONG, 30 May 2024. CSPI Ratings has released a research report titled "Back-testing on the Revenue Cash Flow Forecasting Model for Daily Revenue Obligations (DROs) and Daily Revenue Portfolios (DRPs)." This study assesses the predictive accuracy of CSPI Ratings' Revenue Cash Flow Forecasting Model through five months of back-testing. The study indicates that the portfolio prediction errors were -1.01%, 1.12%, -2.85%, -2.07%, and 0.8%. The model also performed well on key metrics such as Bias, RMSE, and Out of sample R². Dr. Chen Ke, Chief Analytical Officer, noted, “The model shows strong predictive accuracy and adaptability to market changes. Accurate cash flow forecasting for DRO portfolios has significant implications for investors and financial institutions.” The study also provides forecasted revenue cash flows for May 2024, which will be evaluated in a subsequent report, offering further insights into model performance and asset class behavior.

Financial Times Features CSPI Ratings ‘Perspective on China's Ultra-Long-Term Special Government Bond Issuance’

13 May 2024

On 13th May 2024, the Financial Times published an article titled "China Fires Starting Gun on $140bn Debt Sale to Boost Economy," providing a comprehensive overview of the arrangements surrounding the issuance of China's ultra-long special government bonds. The article features an in-depth analysis by Mr. Zuo Yiming (Jameson Zuo), Director of CSPI Ratings, on the arrangements for the issuance of these ultra-long special government bonds. Content: The bond sale “comes at a crucial time for China to reshape its debt structure”, said Jameson Zuo, a Hong Kong-based director at CSPI Credit Rating Co, referring to Beijing’s strategy of using more central government borrowing while trying to tackle the mountain of local government debt. “Compared to a global standard, China still has significant room, potentially trillions of yuan worth of bond issuance over the next five to 10 years, to let the central government take up more leverage and boost investments,” Zuo added.

China Is Reshaping Its Public Debt Structure

08 May 2024

China's public debt landscape is evolving with increased central government borrowing and local governments grappling with implicit debt. As of Q1 2024, China's direct government debt ratio is 56.7%, and above 100% in broad terms, highlighting structural inefficiencies. Proactive fiscal policies are crucial amid sluggish economic performance in China. The Ultra-long special sovereign bonds by the central government of China may raise its debt ratio by 5 percentage. In the 2024 National Budget, general public expenditure rises by 4% to RMB28.5 trillion, resulting in a broad deficit of RMB11.1 trillion, up by 25%. Addressing short-term fiscal challenges requires local governments to diversify revenue sources and trim spending. Long-term solutions entail fundamental fiscal and tax reforms, emphasizing strategic coordination between central and local governments. Also, initiatives like the "Package of Debt Resolution Schemes" enhance accountability and mitigate liquidity risks for LGFVs.

2024 Outlook for Chinese Local Government Creditworthiness

01 Mar 2024

In 2023, China’s nominal GDP growth rate lagged behind real GDP growth due to subdued demand. Only seven provinces, including Tibet, Hainan, and Shanghai, surpassed real GDP growth in nominal terms. For 2024, recovery in consumer spending, infrastructure investment, and industrial policies will boost demand, potentially raising China’s producer price index (PPI) and benefiting industrialized provinces. In 2023, local governments faced challenges due to a sluggish land market, resulting in mediocre fiscal revenue recovery. However, sustained financial support from the central government and controlled fiscal expenditures led to fiscal stability. The average deficit-to-budgetary revenue ratio decreased from 17% in 2022 to 15% in 2023. Looking ahead to 2024, local governments may continue to issue special refinancing bonds to bolster their finances. The proactive fiscal policies aim to support economic growth while managing debt burdens. In 2023, prudent fiscal management and central government support improved local government credit profiles. In 2024, moderate economic growth is expected, but fiscal pressures persist due to sluggish land markets and high expenditure. Local government debt may rise, but lower bond interest rates will mitigate interest payments. LGFVs’ creditworthiness depends on effective policies and risk monitoring.

Reviewing the Offshore Bond Issuance of Chinese LGFVs in 2023

19 Jan 2024

In 2023, Chinese offshore Local Government Financing Vehicles (LGFVs) saw a decrease in bond issuance due to US interest rate hikes and stricter controls. The total volume dropped by 34% to $31.2 billion, with 325 issuances, an 11% decrease. County-level LGFVs dominated, indicating a shift to lower administrative levels. China's urbanization spurred local infrastructure projects, increasing the demand for funding among lower-level LGFVs. Regulatory oversight pushed LGFVs towards offshore financing. RMB-denominated bond issuance surged in 2023 due to lower interest rates, comprising 55% of total issuance. The use of Standby Letters of Credit (SBLC) in LGFV bond issuances increased significantly since 2022, reducing financing costs. SBLC-backed bonds yielded 4.4% in 2023, compared to 6% without SBLC. However, the rapid growth of SBLC issuance may not continue due to various factors.

Rising Contingent Liabilities Risk? China Retains Policy Spaces to Navigate Challenges

05 Dec 2023

After the pandemic, the economy of China (AA/stable) is steadily recovering, with per capita GDP reaching USD12,751 in 2022, higher than the upper point of the range (USD6,000 to USD12,000) that corresponds to Stage Three of economic development out of a five-stage classification system under our sovereign rating criteria. Compared to global peers, China's current government debt burden remains at a moderate level. Over the past few years, China's current account balance has consistently remained in surplus, and its net international investment position remains strong. Additionally, China's external debt burden has long been extremely low, with abundant foreign exchange reserves providing a buffer against external risks. We believe that China's economy is entering a crucial transition from ‘high-speed growth’ to ‘high-quality growth’. During this transition phase, despite challenges such as a real estate downturn, high local government debt, and tension in Sino-U.S. relations, we believe that China's institutions and policies continue to demonstrate adaptability and effectiveness, which help to avoid any systemic risks in the short to medium term. Given its ample room and track record of effective policy responses, we have great confidence in China's long-term sustainable growth, expecting its fiscal strength and external position to remain robust.

Assessing the Overall Debt Risk of Chinese Local Government Financing Vehicles

26 Sep 2023

Through data consolidation and analysis, we estimated that the aggregate interest-bearing debt of Chinese LGFVs with bond issuance practices amounted at approximately RMB56 trillion by the end of 2022. Notably, a significant portion of this debt, nearly 80%, constitutes long-term liabilities, aligning with the inherent operational nature of LGFVs. However, despite the substantial scale of RMB60 trillion of total LGFV liabilities, we maintain a measured perspective and do not perceive an immediate cause for alarm. Overall, we are of the view that the eruption of systemic risks stemming from LGFV debt is highly improbable, although localized risks warrant close attention. Also, the "Package of Debt Resolution Policies" can be seen as a strategic approach aimed at effectively tackling the underlying challenges of LGFV debt.

New Research Sheds Light on Micro Connect’s Daily Revenue Obligations and Key Insights into Related Credit Ratings

11 Sep 2023

This study introduces an analytical framework tailored to the attributes and data availability of DROs, an emerging asset class provided by Micro Connect to connect global capital with small businesses. The research explores modelling techniques for predicting cash flow distributions and evaluating risks for portfolios of DROs, known as DRPs, and provides key insights into credit ratings for asset-backed transactions using DRPs as underlying assets. DROs are an innovative financing instrument that provides contractual rights to a predetermined portion of a business's daily revenue over a specified time frame. These unique instruments have the potential to bridge the financing gap faced by small businesses, particularly those in the early stages, by offering flexible financing that better aligns with their cash flow patterns. For investors, DROs offer a unique investment opportunity with differentiated returns, exposure to China's economy, and the potential for higher yields. This study highlights the distinct characteristics of DROs and the challenges they present in terms of valuation and risk assessment. By leveraging high-frequency revenue data at the individual business level, the study provides approaches on how to overcome the challenges in predicting the revenues of small businesses. The proposed analytical framework incorporates business-specific factors, geographic and sectoral influences, and portfolio diversification effects. Simulating cash flow distributions under various economic scenarios provides insights into tail risks. The approach demonstrates remarkable predictive accuracy when back-tested against actual revenue data.

Chinese Government to Take More Proactive Fiscal Approaches to Boost Consumption for the Rest of the Year

17 Aug 2023

During H1 2023, the national public budget revenue reached RMB1,192 billion, marking a 13.3% YoY increase, primarily due to a 96% surge in VAT income. Adjusted for the low base effect, actual VAT growth was 7.2%. Other major taxes declined, highlighting consumption and trade challenges. Expenditure in H1 2023 rose 3.9% YoY, with healthcare, social security, and education showing sustained growth, while urban-rural spending decreased. In July, the central government introduced 20 measures to boost consumption, emphasizing local fiscal proactivity. Local government bond issuance slowed in H1 2023, reflecting a more balanced pace. National fund revenue and expenditure both decreased YoY by 16% and 21% respectively, attributed to a sluggish real estate market. The narrowed revenue-expenditure gap indicates reduced investment expansion. Local borrowing eased, with bond issuances down 12% YoY. Around 1.6 trillion RMB in new issuance capacity remains untapped, supporting fiscal stimulus potential. Looking ahead, local government bond issuance is expected to remain robust, focusing on investment stability and consumption revival.

China civil aviation on recovery path with outlook turning more favourable

25 Jul 2023

In a recent commentary of CSPI Ratings on China's civil aviation, we uncovered a strong rebound of RPK (Revenue Passenger Kilometre) during the first half of 2023, surpassing the same-period levels in 2019 as the pandemic subsides. However, air passenger traffic in and out of China remained sluggish, recording only 23% of the first half of 2019. Despite the recovery in air traffic and revenue, the Chinese airline industry continued to incur losses in early 2023. This was mainly attributed to the slow international air traffic recovery, high fuel costs, and exchange losses. However, on a net non-cash items basis, we estimate that the Chinese airline industry should have achieved cash earnings again in the second quarter of 2023. Looking ahead, we anticipate a further recovery of profitability and cash flow supported by the expected increase in air traffic during the upcoming winter and spring, and more stable oil prices and exchange rate dynamics. As a result, we foresee an improved standalone credit profile for Chinese airlines in the second half of 2023 and beyond. Furthermore, we expect the Chinese government to continue providing support to state-owned airlines.

RATING  ACTIONS

中证鹏元国际上调滨州市滨城区经济开发投资有限公司国际评级至'BBB'；展望稳定 10 Dec 2024
CSPI Ratings Upgrades Binzhou Bincheng Economic Development Investment Co., Ltd.’s Issuer Credit Rating to ‘BBB'; Outlook Stable 10 Dec 2024
中证鹏元国际撤销贵溪市发展投资集团有限公司国际评级 02 Dec 2024
CSPI Ratings withdraws A(sf) Ratings of Micro Connect 2023-1 DRO-backed Class A Senior Loans 26 Nov 2024
中证鹏元国际撤销滴灌通2023-1 DRO资产支持优先A档贷款‘A(sf)’的评级 26 Nov 2024
CSPI Ratings Assigned ‘AA’ Rating to Two USD Denominated Bonds of China Central Government; Outlook Stable 18 Nov 2024
CSPI Ratings Assigns ‘BBB-’ Rating to Sichuan Fuchuang Development Group Co., Ltd. and the Company’s Proposed Senior Unsecured Offshore Notes; Outlook Stable 18 Nov 2024
中证鹏元国际授予中国中央政府发行的2笔美元债券‘AA’国际刻度长期外币信用评级；展望稳定 18 Nov 2024
中证鹏元国际授予四川涪创发展集团有限公司及其拟发行的高级无担保境外债券'BBB-'国际评级；展望稳定 18 Nov 2024
中证鹏元国际授予松阳县国有资本投资运营集团有限公司发行的高级无担保债券'BBB-'债项评级；展望稳定 15 Nov 2024
CSPI Ratings Assigns ‘BBB-’ Issuance Rating to Songyang County State Capital Investment and Operation Group Co., LTD Senior Unsecured Offshore Bonds; Outlook Stable 15 Nov 2024
中证鹏元国际确认全椒全瑞投资控股集团有限公司'BBB-'国际评级，展望稳定；同时撤销于2023年10月发布的其相关债项评级 11 Nov 2024
CSPI Ratings Upgrades Zibo Zhangdian District State-owned Assets Operation Co., Ltd.’s Issuer Credit Rating to ‘BBB’; Outlook Stable 08 Nov 2024
中证鹏元国际上调淄博市张店区国有资产运营有限公司国际评级至'BBB'；展望稳定 08 Nov 2024
中证鹏元国际上调青岛银行股份有限公司国际刻度主体评级至'BBB+'；展望稳定 07 Nov 2024
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EVENTS  &  REPLAYS

Singapore · 07 Nov 2024 【会议回顾】 中证鹏元国际于在新加坡“第19届亚洲债券市场峰会”发表讲演
Singapore · 07 Nov 2024 【Recap】CSPI Ratings was invited to participate in the “19th Asian Bond Market Summit” in Singapore
Online · 01 Nov 2024 【会议邀请】中证鹏元国际 X DMI “高思在云”：担保公司增信下的中资企业境外债
Online · 10 Oct 2024 【会议回顾】中证鹏元国际评级行动：授予中国中央政府发行的2笔欧元债券‘AA’国际评级
Online · 10 Oct 2024 【Recap】Rating Action：CSPI Ratings Assigned ‘AA’ Rating to Two EUR Denominated Bonds of China Central Government
Online · 23 Aug 2024 【会议回顾】中证鹏元国际：掌舵未来，中国揭示未来五年战略蓝图
Online · 23 Aug 2024 【Recap】CSPI Ratings: Hands on the Wheel，China Reveals the Playbook for the Next Five Years
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