Moody's: Outlook for Chinese regional and local governments is negative

Moody's Investors Service says that the outlook for Chinese regional and local governments (RLGs) in 2016 is negative as China's economy slows, while central-government reforms aimed at improving financial transparency will create further challenges for the RLGs.

"China's economic slowdown will curb the growth in earnings for the RLGs from tax and land sales -- which together account for more than half of their revenues -- and deleveraging is unlikely in 2016," says Nicholas Zhu, a Moody's Vice President and Senior Analyst.

"Historically, there has been a correlation between the growth in China's GDP and in the RLGs' revenues, while another current key negative factor is the uncertainty arising from the lack of visibility over RLG contingent liabilities," says Zhu.

Moody's conclusions were contained in a just-released report on Chinese RLGs, "Regional and Local Governments -- China: 2016 Outlook -- Slowing economic growth and lack of debt transparency drive negative outlook". Moody's sees China's economy growing 6.3% in 2016 compared with 6.8% in 2015.

Moody's notes that the growth in RLG revenue was 9% year-on-year during January-September 2015, down from 10% in 2014 and 13% in 2013, while debt rose by 34% to RMB24 trillion ($3.8 trillion) between June 2013 and December 2014.

"However, the share of RLG debt incurred by state entities such as local government financing vehicles (LGFVs) is unknown, creating uncertainty over the size of the RLGs' contingent liabilities," says Zhu.

In this context, the central government has capped RLG direct debt at RMB16 trillion and has improved their debt structures through the implementation of a RMB3.2 trillion debt-for-bond swap program.

The Moody's report also says -- as indicated -- that government policy changes aimed at reinforcing the RLGs' financial positions for the long-term could cause some challenges during 2016.

The reforms include an overhaul of the RLGs' accounting and financial disclosure standards for the purposes of making them more transparent and the introduction of an accrual basis financial reporting system.

Moody's notes that the benefits of public-private partnerships (PPPs) as an alternative funding solution for infrastructure development will take time to materialize. As a result, for now, LGFVs have to fund large infrastructure investments, increasing the RLGs' contingent liabilities.