Bond Connect Series Event
Zooming into China’s Bond Market
Topic:
Seeing through the Frosted Glass of Chinese
Local Governments Credits and its LGFVs
Date: 13 May 2020
2
House Keeping
1. All participants are on a listen only mode during the call of the webinar.
2. After the presentation, there will be a Q&A session. For any questions for the speakers, please type it in Q&A Box on the bottom right corner. Speakers will discuss in Q&A session at the end of the event.
3
House Keeping
3. The webinar is being recorded. The presentation play back will be available on BCCL Website later in due course. https://www.chinabondconnect.com/en/Newsroom/Events/Zooming-Into-China-S-Bond-Market-Mini-Seminar---Bnp-Paribas.html
4. If any participant requires assistance at any time, please send a message to the host through the chat box in this webinar platform.
Bond Connect Series Event
HOST : MS. GLORIA LIU
Sales & Marketing
Bond Connect Company Limited
Contents
I. The Bond Connect Momentum
II. How to Apply
6
Jul 3 2017
LAUNCH
MilestonesNo. overseas investors approved(Filing notice)
Nov 7 2018Tax exemption clarification of CIT and VAT for interest income effective Nov 7 2018 to 6 Nov 2021
Nov 29 2018Bloomberg announced as 2nd BC trading platform
Mar 23 2018Bloomberg Barclays Index inclusion announcement, starting Apr 2019 and phased in over 20-month period, subjected to tax clarification, DVP, block trade
Architecture design of Bond Connect
Aug 2015
Jul 3 20181st Anniversary announcements of BC enhancements, e.g. Block Trade, Tax, DVP, DerivativesBC Dealers up from 24 to 34BCCL fees— 50% reduction
Aug 27 2018Real-time delivery-versus-payment (DVP) Launched
Aug 30 2018Proposal of a 3 year CIT & VAT exemption
Aug 31 2018Tradeweb Block trade function launched
Mar 2017Li Keqiang pledged bond market connect scheme in 2017
Jun 2017CFETS & HKEX announces launch of Bond Connect
Bond Connect— A Constantly Evolving Scheme
Jan 17 2019• China Bond Market Intl Forum:
Development, Reforms & Opening-up • Bloomberg BC TSOX Go-Live
Jan 31 2019Bloomberg confirms China bonds inclusion effective April 1, 2019
Feb2019Launched Primary Information Platform
Mar 2019• Irish UCITS & AIFs approved for BC• PBoC approves mandates filing
Apr 2019• NCD primary subscription service• Settlement cut off time extension
Apr 1 2019Official inclusion of China bonds in Bloomberg Barclays Index
June 2019• Block Trade allocation: 30 → 50 a/c• Backup Trading Procedures launched
Jul 3 2019Bond Connect Anniversary Summit, enhancements e.g. Adds 13 BC Market makers to 47, Price indication launched
Aug 2019• Extension of settlement cycle to T+3
for international investors
Sep 2019• JPMorgan confirms China bonds
inclusion effective Feb 28, 2020
Dec 2019• Bond Connect E-Filing Launched
JUN
1000
Feb 28 2020Official inclusion of China bonds in JPMorgan IndexGBI-EM Global Diversified (GBI-EM GD), GBI-EM Global, GBI-EM (Narrow), GBI-EM (Narrow) Diversified.Weighting capped at 10%
NOV
200MAY
300DEC
500JAN
600
May
1968
NOV
1500
Source: BCCL as of May 12th, 2020
2020
Mar
1900
2019201820172015
Jan
1700
March 2020• Extended Settlement
Cycles & Settlement Amendment available
April 2020• Addition of 9 BC
Dealers to total 56
May 1 2020 • Bond Connect E-
Filing Global Implementation. Paper submission phased out
7
1906
200
400
600
800
1000
1200
1400
1600
1800
2000
Q1-18 Q1-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20
Dated Access Schemes (QFII/RQFII/Agent Model)
Bond Connect
0
20
40
60
80
100
120
140
160
180
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2018Q1 Aug-18 Nov-18 Feb-19 May-19 Aug-19 Nov-19 Feb-20
Products (L) Incorporated Entities (L)Mandates (L) Monthly Accounts Opened (R)
International Investors Accounts Opened(Bond Connect vs Old Access Schemes)
Source: BCCL as of May 12th, 2020
Rising Impact of Bond Connect as Major Investment Channel
Bond Connect– Account Opening Progress
BC Filing continues to gather speed74 out of Top 100 Global AM Companies Onboarded
Approved Investors NOW:
1968
1906
8
Hong KongTaiwanSingaporeUnited States of AmericaCaymanBritish Virgin IslandsMacauUnited KingdomAustraliaKoreaDubaiJapanSwitzerlandGermanyFranceMalaysiaIrelandBermuda
Source: BCCL as of Apr 17th, 2020
A Changing & Expanding Investor Base— Jurisdiction
LuxembourgCanadaPhilippines
DenmarkBelgiumAustria
Thailand Netherlands Sweden New Zealand Abu Dhabi
Bahamas Italy Finland
Spanning across Investors in 32 Jurisdictions
US, 37.3%
HK, 18.1%
UK, 12.0%
SG, 5.6%
LUX, 4.0%
CA, 4.0%
JP,3.7%
TW, 3.6% Others,
11.7%
9
A Changing & Expanding Investor Base— Investor Type
Source: BCCL
Among the Top 100 Global Asset Management Companies…70 has been onboarded on Bond Connect4 others are in processMore to come…
Bond Connect has welcomed investors of ALL TYPES— Central Banks, Banks, Asset Managements, Hedge Funds, Securities etc.
A Rising Phenomenon in 2019
The entry of Central Banks, Sovereign Wealth Funds & International Financial Institutionsas mandate accounts of external astute Asset Management Companies
~40 has been onboarded on Bond Connect
International Asset Management Funds, 87%
Banks, 7%
Securities, 2%
AM Company, 2% Others, 1%
Insurance, 1%
10
0
10
20
30
40
50
0
500
1000
1500
2000
2500
3000
Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 2020 YE
ADT (RMB billion) Approved Investors Traded Accounts
Accelerating Trading Activities via Bond Connect
Out of 1900+ accounts opened
~800 have now traded
Number of Investor Accounts Opened
Source: BCCL as of May 12th, 2020
ADT (RMB bn)
Trading Volume1. RMB 36.93bn (19 Mar)2. RMB 31.47bn (10 Jan)3. RMB 31.26 bn (02 Jan)4. RMB 30.30bn (21 Oct)5. RMB 29.78bn (11 May)
A Head Start in 2020
An Explosive Growth in Trading Activities
Momentum is on the rise
This is only the Beginning.
NOW
Trade Tickets1. 408 (28 Feb)2. 368 (30 Apr)3. 368 (11 May)4. 318 (24 Apr)5. 312 (19 Mar)
11
45.6% 43.4% 54.9% 50.6% 47.7% 47.0% 41.8%
55.7%56.7%
55.4% 54.3%
46.4%
52.7%
45.1%
50.5%
51.3%36.7%42.8%
26.8% 25.8%
30.1% 31.5% 26.2%
13%
11.3%
13.5%13.5%
21.6%
12.6%
17.1%
16.1%
14.9%
7.7%
8.1%11.5% 15.9%
16.6%15.9%
26.3%
28.9%
28.3%
27.4%30.1%
30.2%
32.7%
35.6%
29.7%
29.8%
3,935
-
1,000
2,000
3,000
4,000
5,000
6,000
0
100
200
300
400
500
600
Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20
Trade TicketsTrading Volume (RMB bn)
PFB NCD CGB MTN SCP & CP Others Tickets
What are Bond Connect Investors Trading?
Trading Activities in Bond Connect
Most frequently traded instruments are Policy Banks, CGBs, to be followed by NCDs.
Most popular tenors remain as <1yr and 7-10yr.
Source: BCCL as of May 12th, 2020
24.7%
9.3%
16.2%
5.2%
42.6%
2.0%
By Tenor
0-1Y
1-3Y
3-5Y
5-7Y
7-10Y
>10Y
12
Primary Market Information Platform (PMIP) &
Primary NCD Subscription Service
• PMIP provides open, timely and reliable information on primary issuance of CIBM• A full English-language channel, disseminating offering documents and underwriters contact for
subscription• ~1700 pre- and post-issuance publications since launch in Feb 2019• On 19 Feb, we completed the first NCD primary issue subscription for 2020. An offshore investor has
subscribed and got satisfactory allocation on China Merchants Bank CNY3 bn 1yr 2.5% primary issuance
Contents
I. The Bond Connect Momentum
II. How to Apply
14Source: BCCL
Bond Connect E-filing System
Launched Q4 2019
• The official online application portal to onboard Bond Connect
• A more efficient application mechanism with:
✓ Simplified application fields✓ Additional transparency of application status✓ Closer communication with BCCL designated account manager✓ Simplified application fields
15
• A Dedicated Website for Bond Connect
http://www.chinabondconnect.com
• Rules and regulations
• Filing procedures for overseas investors
• Reference materials for trading & settlement of Bond Connect
• List of participating entities of Bond Connect
• Latest updates of Bond Connect scheme
• Contact Us
BCCL Sales & Marketing
Unit 4701, 47/F., Two Exchange Square, 8 Connaught Place, Central. Hong Kong
Tel: (+852) 2327 0033
Email: [email protected]
• Follow Us
For more Information
Admission Handbook
16
This document and the information contained herein may not be used other than by the person to whom it is addressed or distributed to and may not be reproduced in any form or transferred to any person. The information contained in this document is for general informational purposes only and does not constitute an offer, solicitation, invitation or recommendation to buy or sell any securities or to provide any investment advice or service of any kind. This document is not directed at, and is not intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject any of Hong Kong Exchanges and Clearing Limited (“HKEX”), China Foreign Exchange Trade System & National Interbank Funding Centre (“CFETS”), Bond Connect Company Limited (“BCCL”), China Central Depository & Clearing Co., Ltd (“CCDC/ChinaBond”) or Shanghai Clearing House (“SHCH”) (together, the “Entities”, each an “Entity”), or any of their affiliates, or any of the companies that they operate, to any registration requirement within such jurisdiction or country.
No section or clause in this document may be regarded as creating any obligation on the part of any of the Entities. Rights and obligations with regard to the trading and settlement of any securities effected on the CFETS, including through the Bond Connect, shall be set out solely in the applicable rules of the Entities, as well as the applicable laws, rules and regulations of Mainland China and Hong Kong in effect from time to time.
Although the information contained in this document is obtained or compiled from sources believed to be reliable, none of the Entities guarantee the accuracy, validity, timeliness or completeness of the information or data for any particular purpose, and none of the Entities or the companies that they operate or their respective affiliates, agents, nominees, representatives, officers and employees shall accept any responsibility for, or be liable for, errors, omissions or other inaccuracies in the information or for the consequences thereof. The information set out in this document is provided on an “as is” and “as available” basis and may be amended or changed in the course of implementation of Bond Connect. It is not a substitute for professional advice which takes account of your specific circumstances and nothing in this document constitutes legal advice. If you are in any doubt about the contents of this document, you should seek independent professional advice. None of the Entities or any of the companies that they operate or their respective affiliates, agents, nominees, representatives, officers and employees shall be responsible or liable for any cost, expense, loss or damage, directly or indirectly, howsoever caused, of any kind, arising from the use of or reliance upon any information provided in this document, or in the presentation given.
Disclaimer
Bond Connect Series Event
SPEAKER :
Mr. Jonathan Hu
Chief Executive Officer, Pengyuan International
Mr. Tony Tang
Chief Analytics Officer, Pengyuan International
Table of Content
19
Development of Local Government and LGFV Bond Market in China
Rating Methodology Comparison Among Peers
China’s Governing Structure and Its Implications to LG Creditworthiness
Credit Differentiations of Chinese Provincial LGs
Quick View on Creditworthiness of Prefecture-level Cities in China
Selected Credit Ratios of LGFVs
Development of LG and LGFV Bond Market in China
Thriving domestic bond market with LG bond in the spotlight
Note: Not include the off-shore outstanding bond totaled USD891 Billion as of May 2020. Source: China Bond, Wind, Bloomberg21
9.4 tn
1.2 tn
10.0 tn2.5 tn
9.7 tn
4.2 tn
Total Bond Outstanding RMB36.9 Trillion
Treasury Note Local Govt Bond
Policy Bank Note Financial Sector Bond
Non-Financial Bond LGFV Bond
16.9 tn
23.0 tn
16.1 tn
16.1 tn
20.3 tn
9.5 tn
Total Bond Outstanding RMB101.9 Trillion
Dec 2014 Mar 2020
2.8X
Out of all subsegments, LG bond grew the fastest, 20x over the last five years.
What is the difference between LG bond and LGFV bond
22
LG Bond
LG bond is the debt security issued by 31 provincial level governments
and 5 independently-planned city governments, namely Shenzhen,
Xiamen, Ningbo, Qingdao, and Dalian, whose interest and principal
payments are backed by government’s taxing powers. LG bond is
equivalent to the “muni” bond in the West. There are two types of LG
bonds:
• General bond (GB,一般债券), often also known as general obligation
(GO) bond, whose interest and principal payment sources are
government’s general budget revenues.
• Special project bond (SPB,专项债券), often considered as revenue
bond, whose interest and principal payments are linked to a specific
public project (often ultimately depends on land sales revenue), and
managed through government fund budget. SPB can also be further
categorized as ordinary SPB (普通专项债) and revenue SPB (项目收益专项债).
The interest payment on LG bond is tax-free.
Issuance pricing mechanism is T+25~40bps.
The credit ratings of LG bonds are usually higher than those of
corporate and financial bonds, therefore the credit risks of LG bonds
are often lower than corporate bonds and commercial bank bonds.
LGFV Bond
LGFV bond is the debt security issued by local government financing
vehicles, which are the entities established by China’s local governments
under the corporate law and are used by LGs to raise money to fund its
infrastructure projects and public services.
LGFV first emerged in late 1990s when central government uplifted most
of country’s tax revenues out of the hands of local governments and
simultaneously offloaded many of its own public service responsibilities to
local authorities, while restrict the LGs to borrow directly at the same time.
The interest payment on LGFV bond is not tax-free.
Issuance pricing mechanism is market oriented.
The creditworthiness of LGFVs is often closely linked to its immediate
government but the credit risks of LGFV bonds are usually higher than its
relevant LG bonds due to the lack of explicit guarantees from the LGs.
In our view, LGFV bond can be considered as a quasi-muni bond at least
for now. Even though the issuing LGFVs often report bad financial
performance (as its performance usually are controlled by LGs), there
hasn’t been any direct public bond default by LGFVs so far, but we have
already seen many cases of non-standard debt product defaults by lower
tier LGFVs in recent years.
Rating Methodology Comparison
LG and LGFV rating criteria comparison with peers
24
Rating Factor Pengyuan S&P Moody's Fitch
Local Government
Economic Strength
Stage of Economic Development √ √ √ √
Growth Performance √ √ √ √
Investment-Driven Growth √
Economic Concentration √ √ √ √
Business Environments √
Demographic Profile √ √ √
Quality of Economic Statistics √
Revenue-sharing Arrangements √
Budgetary Strength
Budgetary Balance √ √ √
Revenue Strength √ √ √
Revenue Growth √ √
Expenditure Sustainability and Adjustability √
Budgetary Flexibility √ √ √ √
Potential Change in Inter-Govt Arrangements √ √
Quality of Budgetary Numbers √
Expected Structural Improvement or Deterioration √
Cash Reserves √ √
Volatility in Performance √ √ √
Underestimated Spending √
Underspending on Pension √
Debt Burden
Debt Level √ √ √ √
Debt Growth √
Payback Ratio √
Interest Payment to Adjust Operating Revenues √ √
Debt Structure √
Liability and Liquidity – Robustness √
Debt Ratio Volatility √ √
Contingent Liabilities √ √ √ √
Quality of Debt Statistics √
Debt Burden Mitigated by Large Onlent Debt √
Questions to be asked:
1. It is debatable whether it makes sense
in reality to have a stand-alone credit
profile (SACP) assessment for Chinese
LGs, given China’s one-party ruling regime
and centralized and vertically-integrated
governing system. Does a Chinese LG
SACP actually carry any logics? In China,
a higher-level government has deep
influence and control over a lower LG’s
finance, staffing, and operations, can a LG
truly be independent or standalone in
China?
2. It is important to identify the proper
rating factors being considered in the
assessment, it is also equally important to
notice the different approaches to
aggregate and consolidate these rating
factors. How should qualitative and
quantitative factors be scored and
combined together? Is the so-called
“weighted average” a good approach for all
factors? is the impact of each factor on
overall creditworthiness linear or non-
linear?
LG and LGFV rating criteria comparison with peers (cont’d)
25
Rating Factor Pengyuan S&P Moody's Fitch
Liquidity
Liquidity Coverage Ratios √ √ √
Special Liquidity Arrangement √ √ √ √
Debt and Liquidity Management √ √ √ √
Access to Non-HLG External Financial Resources √ √ √ √
Quality of Liquidity Statistics √
Expected Structural Changing of Liquidity Coverage Ratio √
Underfunding--large Amounts of Unpaid Supplier Debt √
Expected Volatility in the Liquidity Ratio √
Governance and Financial Management
Budgetary Management √ √ √ √
GRE Management √
Transparency √ √ √ √
Accountability √ √ √
Political and Managerial Strength √
Additional Consideration
Unique Importance of LG to HLG √ √ √ √
Weaker Willingness to Pay √ √ √
Cross-Region Peer Comparison √ √ √ √
Institutional Framework
Predictability √ √
Ability of LRGs to Influence the Intergovernmental System √ √
Fiscal Policy Framework √
Exceptional Support √ √ √
LGFV
LG's Rating (Capacity to Support) √ √ √ √
LGFV's SACP √ √ √
Importance to Government √ √ √
Ties with Government √ √ √
LGFV Characteristics Affecting Support Notching Factors √
Questions to be asked (cont’d):
3. How should we minimize the systemic
and structural bias in the assessment? How
can we actually ensure the consistency
and objectivity of the ratings across
different markets and continents?
Pengyuan’s LGFV rating is a function of three elements
26
• assessed by our Chinese LG rating criteria x1 = LG’s capability to support
• assessed by our GRE rating criteriax2 = LG’s willingness to support
• assessed by to our general corporate rating criteriax3 = LGFV’s SACP
Where:
LGFV.ICR = ƒ(x1, x2, x3)
Local gov’t financing vehicle (LGFV) rating framework
Ownership
Ties with the Gov’t
Gov’t’s Willingness to
Support
LGFV’s Standalone Credit
Profile (SACP)
LGFV’s Issuer Credit Rating
27
Board and Management
Policy & Support Record
Business Connections
Developments and
Expectations
Products and Services
Replaceability
Status within Political,
Social & Legal System
Contribution to the Gov’t
Financial and Social
Impacts of Default
Importance to the Gov’t
Local Gov’t’s Capacity
to Support (LG’s ICR)
Economic Strength Budgetary Strength Debt Burden Liquidity Governance & Fin. Mgmt.
Preliminary Relative Strength Score
(PRS)
Final Relative Strength Score
Indicative Credit Score (ICS)
• Unique importance of the LG to its HLG
• Weaker willingness to service the debt
Rating of HLG
Cross-region Peer
Comparison
Rating range of China’s public finance sector
28
• Under China’s political system, we believe the central
government will keep provincial level governments’
creditworthiness in a close range to its own creditworthiness.
• The difference of creditworthiness among prefecture-level
city governments is much wider than the difference among
provincial-level governments. Similarly, the difference will
further expand among the lower tier county and district-level
governments.
• LGFVs’ creditworthiness is almost always lower than that of
the relevant LGs, the rating equalisation between a LGFV
and its relevant LG is not entirely impossible, but very rare
and unlikely in most scenarios.
B-
B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-
AA
AA+
Sovereign ProvincesPrefecture-level
cities Counties/Districts LGFVsAAA
China’s Governing System and Its Implications to LG Creditworthiness
The leadership structure of Communist Party of China (CPC)
30Note: 1. The current structure is based on the results of election in the 19th Central Committee of the Communist Party of China (CCPC) in Oct 2017. 2. CMC= Central Military Commission; NPC= National People’s Congress; CPPCC= Chinese People's Political Consultative Conference; CCDI= Central Commission for Discipline Inspection. Source: people.cn, Pengyuan international
China’s governing structure – party leads everything
31
The political influence of each province shifts over time
Note: PM=Politburo Member, CCPCF=CCPC Full Member, CCPCA=CCPC Alternative Member, PPS=Political Power Score, mnp=million population, HRO=Higher-Ranking Officials32
19th National Congress of the
CPC (2017 - 2022)
18th National Congress of the
CPC (2012 - 2017)
17th National Congress of the
CPC (2007 - 2012)
16th National Congress of the
CPC (2002 - 2007)
15th National Congress of the
CPC (1997 - 2002)
Region PMCCP
CF
CCP
CAPPS
PPS/
mnpPM
CCP
CF
CCP
CAPPS
PPS/
mnpPM
CCP
CF
CCP
CAPPS
PPS/
mnpPM
CCP
CF
CCP
CAPPS
PPS/
mnpPM
CCP
CF
CCP
CAPPS
PPS/
mnp
Xinjiang 1 3 3 31 1.27 1 3 2 30 1.34 1 2 3 27 1.29 1 3 2 30 1.57 0 3 3 15 0.87
Tianjin 1 1 4 24 1.54 1 1 3 23 1.63 1 0 4 20 1.79 1 1 3 23 2.28 0 2 3 11 1.15
Shanghai 1 1 3 23 0.95 1 0 2 18 0.76 1 1 2 22 1.07 1 1 2 22 1.35 1 1 2 22 1.51
Guangdong 1 1 2 22 0.20 1 1 4 24 0.23 1 0 4 20 0.21 1 1 5 25 0.28 1 1 5 25 0.32
Chongqing 1 0 6 22 0.72 1 1 5 25 0.85 1 0 3 19 0.67 0 3 1 13 0.42 0 2 2 10 0.33
Beijing 1 1 0 20 0.92 1 1 3 23 1.11 1 1 2 22 1.31 1 1 3 23 1.62 1 2 3 27 2.18
Tibet 0 3 2 14 4.15 0 3 2 14 4.55 0 1 2 6 2.08 0 4 2 18 6.74 0 2 4 12 4.84
Hebei 0 2 4 12 0.16 0 2 2 10 0.14 0 2 2 10 0.14 0 2 2 10 0.15 0 3 3 15 0.23
Jiangsu 0 2 3 11 0.14 0 2 4 12 0.15 0 1 2 6 0.08 0 1 2 6 0.08 0 2 3 11 0.15
Guangxi 0 2 3 11 0.23 0 1 4 8 0.17 0 0 4 4 0.08 0 2 3 11 0.23 0 2 3 11 0.24
Hainan 0 2 3 11 1.19 0 2 2 10 1.13 0 1 0 4 0.47 0 2 1 9 1.12 0 2 2 10 1.35
Sichuan 0 2 3 11 0.13 0 1 3 7 0.09 0 2 2 10 0.12 0 2 3 11 0.13 0 2 3 11 0.13
Hubei 0 2 2 10 0.17 0 2 3 11 0.19 0 0 4 4 0.07 1 1 2 22 0.37 0 2 3 11 0.19
Anhui 0 2 2 10 0.16 0 2 2 10 0.17 0 2 3 11 0.18 0 1 2 6 0.09 0 2 2 10 0.16
Hunan 0 2 2 10 0.15 0 2 2 10 0.15 0 2 4 12 0.19 0 2 2 10 0.15 0 1 3 7 0.11
Gansu 0 2 2 10 0.38 0 2 2 10 0.39 0 0 3 3 0.12 0 2 1 9 0.35 0 1 2 6 0.24
Guizhou 0 2 2 10 0.28 0 2 2 10 0.29 0 0 5 5 0.14 0 2 3 11 0.29 0 2 3 11 0.31
Shanxi 0 2 2 10 0.27 0 1 3 7 0.19 0 2 3 11 0.32 0 2 4 12 0.36 0 2 4 12 0.38
Shaanxi 0 2 2 10 0.26 0 1 2 6 0.16 0 1 1 5 0.13 0 2 2 10 0.27 0 2 3 11 0.31
Shandong 0 2 1 9 0.09 0 2 3 11 0.11 0 3 1 13 0.14 0 1 4 8 0.09 1 1 3 23 0.26
Zhejiang 0 2 1 9 0.16 0 1 5 9 0.16 0 1 1 5 0.10 0 2 3 11 0.24 0 3 2 14 0.32
Henan 0 2 1 9 0.09 0 2 3 11 0.12 0 2 2 10 0.11 0 2 3 11 0.11 0 2 3 11 0.12
Inner Mongolia 0 2 1 9 0.36 0 2 3 11 0.44 0 1 2 6 0.25 0 2 3 11 0.46 0 2 3 11 0.47
Yunnan 0 2 1 9 0.19 0 2 3 11 0.24 0 1 3 7 0.16 0 2 2 10 0.23 0 1 4 8 0.20
Ningxia 0 2 1 9 1.32 0 1 2 6 0.93 0 1 2 6 0.98 0 2 2 10 1.75 0 1 2 6 1.13
Jiangxi 0 1 4 8 0.17 0 2 4 12 0.27 0 1 2 6 0.14 0 2 3 11 0.26 0 2 2 10 0.24
Heilongjiang 0 1 4 8 0.21 0 2 1 9 0.23 0 1 2 6 0.16 0 2 4 12 0.31 0 2 3 11 0.29
Fujian 0 1 3 7 0.18 0 2 4 12 0.32 0 1 3 7 0.19 0 2 1 9 0.26 0 2 2 10 0.30
Jilin 0 1 3 7 0.26 0 2 3 11 0.40 0 1 4 8 0.29 0 2 2 10 0.37 0 2 4 12 0.46
Liaoning 0 1 3 7 0.16 0 2 2 10 0.23 0 1 3 7 0.16 0 2 3 11 0.26 0 2 1 9 0.22
Qinghai 0 1 2 6 1.00 0 1 3 7 1.22 0 1 2 6 1.09 0 2 2 10 1.89 0 2 2 10 2.02
Total Local HRO 6 52 75 379 6 51 88 388 6 33 80 308 6 58 77 405 4 58 87 383
Total In CCPC 25 204 172 25 205 171 25 204 167 23 198 158 22 193 151
Political influence of provincial-level local governments
Note: Estimated based on 19th National Congress of the Communist Party of China. The calculation method is to sum up the score of the high-ranking officials in the region with different weights as: Alternative member of Central Committee: Full member of Central Committee: Politburo member =1:4:16. 33
Higher political standing doesn’t automatically guarantee higher central government
supports at all time in any circumstance, but it definitely represents stronger voice in
the formation of policies and advantages over peers in the fight for resources.
Credit Differentiations of Chinese Provincial LGs
Rating distribution of provincial governments
35
• Overall speaking, the better developed east and south
costal provinces have stronger credit profiles than inland
provinces and regions.
• China is a centralized one-party ruling country and has a
vertically integrated governing structure, but it doesn’t
mean the local government’s ratings can be equalized to
its higher-level government (HLG). To be specific, we
believe that sovereign creditworthiness will always be
higher than that of provincial-level governments, which will
always be higher than that of prefecture-level city
governments.
• The capital cities may play a crucial political, economic
and social role in the country and regions, it doesn’t mean
it has the same creditworthiness as the sovereign and
provinces. In some cases, the creditworthiness of a capital
city government may be very close, such as half of a
notch, to that of its HLG, but the difference shall always be
present in theory and in reality.
Chinese LGs manage four sets of budgets
Note: we consider these components as the operating revenue sources of a LG.36
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Tax Non-tax fee Transfersand refunds
Budgetstabilization
fundsupplement
Carryoverfrom prior
year
Land salesproceeds
Othergovernment
fundincome
Carryoverfrom prior
year
SOE profit Otherincome
from SOE
Socialsecurity
insurancepremium
Fiscalsubsidies
Government
general budget
SOE capital
operating
budget
Government
fund budget
Social security
fund budget
Provincial Economic Strength
37Source: NBS, local governments’ bureaus, Pengyuan estimates
RegionAvg. GDP
growth(2015-19,%)
Capital Formation
Ratio(2017,%)
Total Dependency
Ratio(2018,%)
Guizhou 9.8 69.1 50.6
Tibet 9.7 105.0 41.3
Yunnan 8.8 94.6 38.2
Jiangxi 8.7 50.1 42.9
Chongqing 8.7 53.4 45.8
Fujian 8.3 57.5 35.5
Anhui 8.3 50.8 46.6
Hubei 8.0 58.8 38.6
Hunan 8.0 51.9 47.0
Sichuan 7.9 48.7 45.7
Henan 7.8 69.7 47.8
Shaanxi 7.6 65.8 34.3
Ningxia 7.5 110.6 41.0
Zhejiang 7.4 44.0 36.4
Qinghai 7.4 148.5 37.3
Xinjiang 7.3 99.7 42.4
Jiangsu 7.3 43.5 38.9
Guangdong 7.2 44.2 33.6
Guangxi 7.1 50.6 46.8
Shandong 7.0 50.1 49.6
Hainan 6.8 63.1 37.7
Hebei 6.7 56.1 45.3
Shanghai 6.7 39.8 33.0
Beijing 6.6 39.1 27.8
Gansu 6.4 51.0 40.7
Tianjin 6.1 56.4 26.9
Inner Mongolia 5.9 64.0 30.1
Shanxi 5.5 46.1 35.0
Heilongjiang 5.4 61.2 29.5
Jilin 5.2 66.8 32.7
Liaoning 3.2 43.3 33.6
Provincial Budgetary Strength
38Source: MOF, local governments’ bureaus, Pengyuan estimates
RegionRevenue(2017-
19 Avg., bn)Rev/GDP(%)
Transfer &
Refund/Rev(%)
Land
Sales/Rev(%)
Guangdong 1,977 20 9.6 27.1
Jiangsu 1,864 20 10.8 40.0
Zhejiang 1,626 28.2 6.5 41.4
Shandong 1,477 21.1 18.2 32.6
Sichuan 1,193 28.4 41.7 24.1
Henan 1,136 22.9 33.5 23.7
Shanghai 999 28.7 8.6 19.9
Hubei 969 23.6 33.1 28.8
Hebei 944 27.4 30.1 20.4
Anhui 938 29 33.8 33.2
Beijing 915 28.8 12.1 24.4
Hunan 861 23.4 37.9 21.6
Jiangxi 698 31.1 30.6 27.0
Fujian 658 17.6 16.0 32.4
Yunnan 649 32.4 52.9 14.1
Chongqing 638 29.8 29.7 31.7
Shaanxi 612 25.6 38.7 17.1
Liaoning 599 25 39.7 11.5
Guizhou 597 39.2 46.4 20.5
Guangxi 596 30.1 46.5 18.8
Xinjiang 507 40.8 60.6 9.4
Inner Mongolia 506 30.7 48.7 6.9
Shanxi 486 30 33.1 6.7
Heilongjiang 474 33.8 65.6 5.2
Tianjin 414 27.6 12.0 28.6
Jilin 394 31.8 56.1 12.3
Gansu 376 46.4 66.2 7.7
Tibet 201 132.4 86.0 n/a
Hainan 198 40.4 41.6 14.9
Qinghai 166 59.7 71.2 4.6
Ningxia 141 39.4 61.8 5.5
Provincial Debt Burden
39Note: Debt growth = Average change in Debt to GDP Ratio. Source: MOF, local governments’ bureaus, Pengyuan estimates
RegionBroad Debt
(2019, bn)
Direct
Debt/GDP(%)
Hidden
Debt/GDP(%)
Jiangsu 3,876 14.9 24
Zhejiang 3,336 19.7 33.8
Shandong 3,123 18.5 25.5
Guangdong 3,116 11.1 17.8
Hunan 3,039 25.6 50.8
Henan 2,903 14.6 38.9
Hubei 2,675 17.5 40.8
Shaanxi 2,673 25.3 78.3
Hebei 2,458 24.9 45.1
Sichuan 2,421 22.5 29.4
Guizhou 2,396 57.7 85.2
Fujian 2,376 16.6 39.5
Anhui 2,314 21.4 41
Chongqing 1,965 23.7 59.5
Liaoning 1,915 35.7 41.2
Yunnan 1,901 34.2 47.6
Inner Mongolia 1,860 42.4 65.6
Guangxi 1,789 29.9 54.3
Jiangxi 1,719 21.5 48
Tianjin 1,391 35.2 63.4
Xinjiang 1,310 35.7 60.7
Jilin 1,128 37.1 59.1
Shanghai 1,105 15 14
Shanxi 1,081 20.8 42.6
Heilongjiang 1,032 34.9 40.9
Beijing 931 14 12.3
Gansu 702 35.7 44.8
Qinghai 414 70.9 68.7
Hainan 413 42 35.8
Ningxia 354 44.1 50.2
Tibet 118 14.8 54.8
Provincial Liquidity
40Note: 1, All the data and ratios are reflecting performance in 2020. 2, Liquidity coverage ratio is a broad idea considering all liquidity sources and liquidity use.
3, Internal liquidity ratio only comprises fiscal deposit, deficit and debt service to give a simple sight of liquidity condition. Source: PBOC, MOF, local
governments’ bureaus , Wind, Pengyuan estimates
RegionFiscal Deposit
(2019,bn)
Budgetary Deficit
(2020,bn)
Debt Service
(2020,bn)
Internal Liquidity
Ratio (2020,%)
Guangdong 356 297 117 86.1
Shanghai 311 67 76 217.2
Zhejiang 245 214 127 71.7
Jiangsu 236 273 231 46.9
Hebei 168 249 103 47.6
Hubei 161 214 90 53.0
Shandong 160 199 147 46.1
Sichuan 160 205 176 42.0
Beijing 157 100 76 89.6
Anhui 130 172 96 48.4
Jiangxi 127 173 68 52.5
Hunan 111 124 128 43.9
Chongqing 107 103 71 61.8
Fujian 102 170 86 39.7
Liaoning 96 58 148 46.5
Yunnan 90 145 101 36.6
Tibet 86 8 2 925.3
Heilongjiang 85 91 59 56.9
Xinjiang 80 125 61 43.3
Shaanxi 63 84 88 36.7
Shanxi 60 87 43 46.1
Henan 60 245 79 18.5
Qinghai 51 35 24 88.0
Guangxi 49 104 78 26.8
Guizhou 47 89 155 19.3
Jilin 45 92 62 29.2
Inner Mongolia 44 69 115 23.9
Gansu 33 77 41 28.1
Hainan 31 35 29 48.7
Tianjin 24 152 53 11.7
Ningxia 16 31 18 33.0
Quick View of Prefecture-level Cities in China
Sample Prefecture-level Cities
42
Region Province
Sample
Prefecture
City
Eastern China
Hebei 11
Fujian 9
Hainan 3
Zhejiang 11
Jiangsu 13
Guangdong 21
Shandong 17
Tianjin n/a
Beijing n/a
Shanghai n/a
Central China
Hunan 13
Hubei 12
Henan 17
Jiangxi 11
Shanxi 11
Anhui 16
Western China
Qinghai 2
Shaanxi 10
Guizhou 6
Tibet 6
Gansu 12
Xinjiang 4
Guangxi 14
Ningxia 5
Sichuan 18
Inner Mongolia 9
Yunnan 8
Chongqing n/a
Northeastern
China
Heilongjiang 12
Liaoning 14
Jilin 8
43
Rev. Per Capita
0 RMB56,000
Note: All indicators were calculated based on the four-year-average from 2015 to 2018, and extreme values were excluded.
Source: Local governments’ bureaus, Wind, Pengyuan estimates
Prefecture-level cities’ creditworthiness varies greatly
44
Budgetary Revenue
0 RMB340 billion
Note: 1. All indicators were calculated based on the four-year-average from 2015 to 2018, and extreme values were excluded. 2. Self-sufficiency ratio=1-
(Transfer & refund)/ Budgetary rev.; Land sales dependency ratio=Land sales/Budgetary rev.
Source: Local governments’ bureaus, Wind, Pengyuan estimates
Prefecture-level cities’ creditworthiness varies greatly
45
GDP Per Capita
0 RMB200,000
Note: All indicators were calculated based on the four-year-average from 2015 to 2018, and extreme values were excluded.
Source: Local governments’ bureaus, Wind, Pengyuan estimates
Prefecture-level cities’ creditworthiness varies greatly
Selected Credit Ratios of LGFVs
47Note: 1. All indicators were calculated based on the three-year-average from 2016 to 2018, and extreme values were excluded 2. MIPS=Municipalities with independently-planned status.
3. The samples of LGFVs totaled 2028.
Source: Wind, Pengyuan estimates
Leverage indicators of different level LGFVs
0
100
200
300
400
500
600
Num
ber
of LG
FV
s
Debt-to-assets ratio(%)
0
50
100
150
200
250
300
350
400
450
Num
ber
of LG
FV
s
Cash/short-term debt(%)
48Note: 1. All indicators were calculated based on the three-year-average from 2016 to 2018, and extreme values were excluded. 3. The samples of LGFVs totaled 2028.
Source: Wind, Pengyuan estimates
Profitability indicators of different level LGFVs
0
200
400
600
800
Num
ber
of LG
FV
s
ROA (%)
0
150
300
450
600
750
Num
ber
of LG
FV
s
Net operating cash flow/revenue (%)
49Note: 1. The fixed assets/total assets ratio was calculated based on the three-year-average from 2016 to 2018 while the five-year average growth rate of equity capital was from 2013 to 2018, and
extreme values were excluded . 2. MIPS=Municipalities with independently-planned status. 3. The samples of LGFVs totaled 2028.
Source: Wind, Pengyuan estimates
Government support indicators of different level LGFVs
0
100
200
300
400
500
600
700
800
900
1000
Num
ber
of LG
FV
s
Five-year average growth rate of equity capital(%)
0
200
400
600
800
1000
1200
Num
ber
of LG
FV
s
Fixed assets/total assets(%)
Contact Us
Tony Tang
Chief Analytics Officer
1002, 10/F, Prosperity Tower 39
Queen’s Road Central
Central, Hong Kong
+852 3615 8278
50
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