Local Government loan curbs could reduce China’s sovereign credit risks: S&P

SINGAPORE - China's new blueprint for reforms unveiled at the Third Plenum  include proposals that could help tackle debt levels at regional and local governments (LRGs) and lower the financial, economic, and fiscal risks to sovereign creditworthiness if implemented effectively, according to ratings agency Standard & Poor’s.

China's new leadership aims to reduce the incentives and need for LRGs to aggressively borrow, S&P say adding that while China’s central Government targets 2020 for decisive breakthroughs in key reforms, there is potential for even earlier progress.
"The central Government's emphasis on controlling risks associated with the rapid increase in LRG debt in recent years could help to speed up reform of local government financing," says S&P credit analyst Kim Eng Tan. "We believe the risks to the sovereign credit rating on China [AA-/Stable/A-1+; cnAAA/cnA-1+] arising from LRGs' debt burdens are likely to moderate over the next three to five years as the reform initiatives kick in."
Much hinges on the central government's ability to reduce the dependence of economic growth on LRG investments, according to the report. Additional factors would include the local authorities' commitment to beefing up their transparency and accountability over debt levels. The central government's blueprint includes a requirement for LRGs to provide stronger justification for new borrowings. It also proposes to more closely associate the performance appraisals of local officials with how much debt their authorities have incurred.
"Overall, the taming of LRG debt will pivot around the success of market-oriented reforms. Over the next three to five years, it's still possible that the central government will allow LRGs to borrow heavily to make large-scale investments,” Tan says. “That scenario may materialise if market-oriented reforms proceed too slowly to achieve the central government's GDP growth target through the vibrancy of the private sector - and by keeping State-owned enterprises at arm's length from LRGs." www.standardandpoors.com (ATI).