Growing debt burden in mainland provinces causes concern
The debt burden of some provinces on the mainland is becoming "worrisome" as they face the double whammy of slowing fiscal revenue and tightening bank loans, warn credit rating agencies.
The debts of four provinces - Hubei, Jilin, Hainan and Hunan - are "fairly high" and may result in "high financial risks", said Terry Gao, an associate director at Fitch yesterday.
Local authorities at the moment hold far less cash than they need to repay loans, said Moody's analyst Katie Chan. She warned of a high rollover rate at mainland banks for local-government loans that will mature this year as local financing vehicles are struggling to pay back.
The debt-to-fiscal-revenue ratio for the central province of Hubei, for example, reached 181 per cent in 2010, according to Fitch. That is on par with countries known to have high debt levels, such as Britain and France. China's overall debt-to-revenue ratio is 165 per cent.
"The whole area is very opaque, so it is difficult to know what the outcome would be. But ... there is a lot of these debts being built up and we expect the financial pressure on local governments to increase as more debt piles up this year," said Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch.
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Although some western provinces such as Gansu, Henan and Xinjiang have relatively lower debt-to-revenue ratios, at less than 100 per cent, investors should not be too optimistic, since these provinces also have limited financial flexibility because of their dependence on the fiscal subsidy they receive from the central government, Fitch said.
For Guangdong province and Beijing, the risk is much lower as they have more diversified tax bases and strong economic fundamentals, Fitch's Gao said.
Tax, land sales and central government transfers are the main components of provinces' incomes. The latter two sources were stagnating, said Fitch.
Land sales, the major revenue generator, fell by 14 per cent year on year last year and could flatline this year, Fitch said.
Margins from selling land use rights to property firms were set to decline to just 20 per cent from over 40 per cent five years ago, it added.
According to Moody's senior credit officer Ivan Chung, whether local governments will go bust will depend on the central government's readiness to share some of the burden.
Some changes in this direction are anticipated after March as the new leadership takes over.