CSPI Ratings Affirms the ‘A+’ Rating on the Shanxi Provincial Government; Outlook Stable


14 Nov 2023

    HONG KONG, 14 November 2023. CSPI Ratings has affirmed the global scale long-term foreign-currency and local currency issuer credit rating (ICR) of ‘A+’ on the Shanxi provincial government. The ratings reflect the province’s favourable budgetary performance, moderate debt level and healthy liquidity position, while its relatively lagging stage of economic development and the over-concentration of the economic structure are also factored in. The outlook is stable.

    Shanxi is a landlocked province in northern China (AA, stable), bordering the provinces of Henan and Hebei. The province covers an area of 156,700 square kilometres, accounting for 1.6% of China’s total land area. Shanxi has 11 prefecture-level cities, with Taiyuan as its capital. As of 2022, the province had a population of 34.8 million, or about 2.5% of the country’s population.

    Credit Strengths

    Thanks to robust general public budgetary revenue and stable fiscal support from the central government, the Shanxi government has fostered a formidable fiscal strength in recent years. Shanxi's budgetary revenue structure has been consistently optimised, with the proportion of tax revenue to general public budgetary revenue reaching 78.1% in 2022, indicating enhanced fiscal self-sufficiency. Moreover, transfer payments from the central government continue to serve as a significant source of its fiscal revenue. Considering Shanxi's strategic importance in the national energy supply and the explicit commitment from the central government to support the economic transformation of energy-producing provinces, it is anticipated that the scale of fiscal support to Shanxi will experience sustained growth in the foreseeable future. Additionally, the Shanxi government upholds a commendable budgetary balance management. Our calculations reveal that the average budgetary balance ratio for the period 2018-2022 stood at -12.6%, positioning the province favourably among its counterparts nationwide in terms of budgetary balance performance and light fiscal deficit burden. Although the decline in energy prices in 2023 has exerted a certain impact on related revenue for Shanxi, we believe the government will maintain a moderate deficit level in 2023 and the subsequent two years, with its budgetary balance performance continuing to surpass that of many other provinces.

    Throughout the years, the Shanxi government has exercised cautious debt expansion, maintaining a moderate debt level and a healthy liquidity position. According to our calculations, in 2022, Shanxi’s broad debt-to-budgetary revenue ratio and broad debt-to-GDP ratio were 148% and 38% respectively, both lower than many provinces nationwide. Furthermore, the province has demonstrated controlled debt growth, with an estimated average change of 2 percentage points in the broad debt-to-GDP ratios from 2021 to 2025. In terms of liquidity, the Shanxi government possesses ample sources of liquidity. As of the end of 2022, the provincial government had a fiscal deposit amounting to RMB146.4 billion. Additionally, given its relatively low leverage level, the government still has room for borrowing. Therefore, we anticipate that Shanxi’s liquidity position will remain healthy over the next two years.

    Credit Weaknesses

    We believe that Shanxi's economic development lags behind that of many other provinces in the country, mainly reflected in its relatively low GDP per capita and imbalanced industrial structure. In recent years, the disparity between Shanxi's GDP per capita and the national average has gradually narrowed. In 2022, Shanxi ranked 20th in terms of GDP among all provinces, with its GDP per capita surpassing RMB70,000 for the first time, reaching RMB73,666. However, it still lags behind the national average by 14% and ranks average among all provinces. In addition, Shanxi’s three-industry structure in 2022 stood at 5.2:54.0:40.8, with a significantly higher proportion of secondary industry compared to the national average and a lower rank in terms of tertiary industry proportion among all provinces. This indicates that the province has yet to establish a diversified economic structure. The continuous net outflow of the population in recent years has also unfavourably impacted Shanxi’s long-term economic prospects. Overall, Shanxi exhibits a relatively weak economic foundation and a moderate economic development level.

    Shanxi epitomises a resource-based economic province with a significant reliance on the coal industry. For a long time, Shanxi has maintained a leading position nationwide in terms of coal production, with coal mining and related sectors serving as the cornerstone of the province's economic development, indicating an overly concentrated economic structure. However, since commencing its transition from a resource-based economy, Shanxi has encountered limitations in coal industry development due to production capacity reduction, resulting in declining industrial value-added growth and regional GDP growth over the past few years. These trends underscore the province's relatively feeble overall economic development momentum beyond the energy sector. Moreover, the coal industry is susceptible to cyclical fluctuations and is particularly vulnerable to energy price volatility. The unsustainable surge in coal prices over the past two years, which significantly boosted profits for Shanxi's coal enterprises, is unlikely to persist. Consequently, the province's GDP growth has gradually declined in tandem with falling coal prices since the beginning of this year. In the first three quarters of 2023, Shanxi's GDP recorded a year-on-year growth rate of 4.5%, trailing behind the national average. Considering the ongoing descent of coal prices, we anticipate limited potential for a substantial rebound in economic growth during the fourth quarter of 2023, projecting a moderate growth rate of approximately 5% for the full year. Overall, expediting industrial transformation and upgrading remains the top priority for Shanxi's economic development over the next few years.

    RATING OUTLOOK

    The stable outlook of Shanxi reflects our expectation that China’s credit profile will remain stable and Shanxi’s economic performance and budgetary strength will remain solid over the next 12 to 24 months.

    We would consider downgrading Shanxi’s issuer credit rating if 1) Shanxi’s budgetary balance deteriorates precipitously or its budgetary revenue growth declines sharply; and/or 2) the province’s debt burden increases significantly.

    We would consider upgrading Shanxi’s issuer credit rating if 1) there is a rating upgrade action by us on China; and/or 2) Shanxi’s economic structure has been greatly enhanced or its economic development level improved substantially.

    Note: The ratings mentioned in this press release are unsolicited.

    ANALYST CONTACTS

    Primary Analyst

    Jameson Zuo, FRM

    +852 3615 8341

    jameson.zuo@cspi-ratings.com

    Secondary Analyst

    Siqi Lin

    +86 755 83210225

    siqi.lin@cspi-ratings.com

    Committee Chair

    Winnie Guo

    +852 3615 8344

    winnie.guo@cspi-ratings.com

    Media Contact

    media@cspi-ratings.com

    Rating Services Contact

    Allen Wei

    +852 3615 8324

    allen.wei@cspi-ratings.com

    Date of Relevant Rating Committee: 13-November-2023

    Additional information is available on www.cspi-ratings.com

    Related Criteria

    Chinese Local Government Rating Criteria (29 June 2021)

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