S&P warns of inherent risks in local govt bonds

Half of China's local governments could warrant junk-level credit ratings, according to ratings agency Standard & Poor's Financial Services LLC, in stark contrast to the view of domestic ratings agencies.

While refusing to specify which provinces exactly might be considered as "junk", S&P said in a report that three provinces in Northeast China had what it called "speculative-grade credit features".

Wide differences exist between China's well-off eastern provinces and the less prosperous inland regions.

Eight out of the 10 provinces in eastern China were judged by S&P to have investment-grade features, while just two out of the six provinces in Central China, and five of the 12 in western China were given them.

S&P does not officially rate Chinese local governments and said its credit assessments were based on publicly available data and information, which is incomplete for some governments.

If additional information were to become available, it said its assessment of credit quality for some of these governments could differ.

Under S&P's normal criteria, issuers are given various ratings from the top AAA to D.

Even within "speculative-grade" ratings, there are various levels from BB, B, CCC to CC, each with different degrees of speculation.

S&P did not elaborate on the provinces with speculative features but emphasized that 15 other provincial governments had investment-grade credit profiles. These governments, eight in eastern China, "are likely to stay at this level for the next two years", it said, as they enjoy a higher level of wealth, greater physical and human capital, better governance and fiscal management.

Xie Yaxuan, head of macroeconomic research at China Merchants Securities Co Ltd, said "it is debatable whether foreign agencies' rating methodology can be accurately applied to China, and given the incomplete revenue and expenditure data on local governments, S&P's analysis should be viewed with caution."