Credit risks persist for local govts

The default risk of some sub-provincial governments in China and their financing platforms could rise significantly during the next two years, Standard & Poor's said in a report on Tuesday.

The report, entitled "No Major Default So Far; So Are Chinese Local Government Debts Now Safer?," says the debt profile of some local and regional governments (LRGs) remains risky. The cash flow needs of many LRGs and their financing platforms will remain high in the next few years.

Moreover, many LRGs may have weakening liquidity positions, which, combined with a perception of more modest future extraordinary government support, could rein in new borrowing.

"The risks are particularly high for county-level governments that have incurred high-cost, short-term borrowing from non-bank financial institutions," said Standard & Poor's credit analyst Kim Eng Tan.

"Some LRGs may find themselves trapped in a cycle. They may have to spend more on infrastructure to generate higher receipts from land sales. And that's just so they can reap enough profits from such sales to repay the debt incurred earlier for infrastructure investment."

The report estimates that the growth of broad LRG debt has fallen in line with other economic trends and poses low systemic risk to China's financial system.

"We believe China can avoid any systemic economic risk from LRG debt because key supporting factors from the past are still in place. These include the central government's strong financial strength, its commitment to preventing systemic risk, and China's strong economic fundamentals," Tan said.

Standard & Poor's believes the Chinese government is likely to make notable progress over the next two to five years in enabling greater participation of private-sector lenders and State-owned enterprises in infrastructure and utilities investment. In addition, the government may introduce a better-defined LRG borrowing framework with a larger role for municipal bonds and greater fiscal transparency.