S&P, Moody’s Downgrade 11 Chinese Local Government Financing Vehicles

Two major global rating agencies separately downgraded a combined 11 Chinese local government financing vehicles (LGFVs) Wednesday on expectations that local governments’ extraordinary support for their respective financing platforms will weaken.

The downgrades reflect a belief that the Chinese central government’s deleveraging efforts will gradually weaken the financial vehicles’ roles and links with the local and regional governments.

S&P Global Ratings said it had cut by one notch the credit ratings of seven LGFVs from the provincial-level municipalities of Chongqing and Tianjin, and the cities of Wuxi, Yangzhou, Changsha and Zhenjiang.

Meanwhile, Moody’s Investors Service said it had downgraded five issuers owned the governments of Hubei province, Tianjin, and the cities of Nanjing and Zhuzhou.

Both S&P and Moody’s downgraded Tianjin Binhai New Area Construction & Investment Group Co. Ltd., an investment and financing platform wholly owned by the Tianjin State-owned Assets Supervision & Administration Commission.

The other six LGFVs downgraded by S&P are Chongqing Nan’an Urban Construction & Development (Group), Tianjin Infrastructure Construction & Investment Group, Wuxi Construction and Development Investment, Yangzhou Urban Construction State-owned Assets Holding (Group), and Changsha Pilot Investment Holdings, and Zhenjiang Transportation Industry Group.

The other four LGFVs downgraded by Moody’s are Nanjing Yangzi State-Owned Assets Investment Group, Tianjin Free Trade Zone Investment Holding Group, Hubei Science & Technology Investment Group, and Zhuzhou City Construction Development Group.

Bonds issued by the LGFVs usually get high ratings because they have strong and stable funding support from the governments. But a surprise default by a Xinjiang-based LGFV last month shook investors’ faith in guaranteed payment of these government-backed bonds.

On Aug. 13, Sixth Division of State-Owned Asset Management Co. Ltd., a subsidiary of the formerly military-owned Xinjiang Production & Construction Corps, failed to pay back principal and interest on a 500 million yuan ($72.8 million) bond, marking the first default of a LGFV bond.

LGFVs have been a major driver of economic growth in the past decade, funding projects such as roads, hospitals and airports. Both Moody’s and S&P pointed out in their notes that LGFVs will continue to play an important role in the support of China’s economic growth.

The LGFV sector poses systemic risks given its large amount of debt outstanding, which means that the central government is unlikely to allow large and important nonfinancial corporate and infrastructure government-related issuers to default, Moody’s said.

The Chinese government is currently weighing the needs to maintain growth and rein in financial risks amid a slowing domestic growth and an escalating trade war with the U.S.

In July, the State Council, China’s cabinet, specifically asked local governments to ensure sufficient funding for continuing and new infrastructure projects, while announcing a 1.35 trillion yuan spending plan for local government infrastructure projects.

S&P said the credit outlook for the LGFVs is stable over the next 24 months, and it expects local governments to take steps to mitigate the refinancing risks of their financing platforms.