Bond Connect Series Event Zooming into China’s …...Bond Connect Series Event Zooming into...

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.


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)


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


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.


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

http://www.chinabondconnect.com/

mailto:[email protected]

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


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)


CPC (2012 - 2017)


CPC (2007 - 2012)


CPC (2002 - 2007)


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.



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.



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.


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.


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

[email protected]

50

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