Pengyuan Credit Rating

Public Finance China

Jilin Provincial Government Credit Report

Ratings Summary

▪ Pengyuan International has affirmed its global scale long-term foreign-currency Issuer Rating issuer credit rating (ICR) of ‘A’ and long-term local-currency ICR of ‘A+‘ to the LT FC Issuer Credit Rating A Jilin provincial government. The outlook is stable. The ICR is backed by the LT LC Issuer Credit Rating A+ province’s favorable liquidity condition and strong industrial base but also reveals its weaknesses in economy and budgetary performance. Outlook Stable ▪ Jilin is an inland province in northeastern China (AA/AA+, stable), bordering Russia and North Korea. The province covers an area of 187,400 square

kilometers, accounting for 1.94% of China’s land area. Jilin has eight prefecture-level cities and one autonomous state. It had a total population of 26.9 million at the end of 2019, about 1.9% of the country’s population. Contents ▪ The once important industrial base of China has seen an apparent slowdown

in its economic growth. The adjustment of statistical metrics since the Fourth Summary ...... 1 National Economic Census in 2019 further shrunk Jilin’s gross domestic Rating Outlook ...... 3 product (GDP) which was already underwhelming among its peers in recent

years. The GDP and GDP per capita of the province were RMB1.17 trillion and Economic Strength ...... 3 RMB43,691 respectively in 2019, both ranking at the lower end nationally. Yet, Budgetary Strength...... 4 after years of weak economic growth, and in spite of the Covid-19’s impact,

Jilin’s essential automobile manufacturing sector’s added value grew 9.2% year Debt Burden ...... 5 on year in the first half of 2020, strongly bolstering the province’s economy. We Liquidity ...... 5 therefore expect Jilin’s economic growth to catch up with the nation this year.

Peer Comparison ...... 6 ▪ The growth of general public revenue of the Jilin general government (GG) had

Province Background ...... 10 been dampened by the reorienting and restructuring of the local economy but government fund revenue unexpectedly surged this year. The GG’s Rating Scores Summary ...... 11 government fund revenue and expenditure jumped 23% and 80.9% year on Related Criteria ...... 11 year respectively in the first half of 2020 despite Covid-19. We reckon the GG is speeding up its land sales and hastening the expenditure. Its deficit will remain large in the next few years. The deficit burden on the GG is increasingly heavier and we expect the deficit to revenue ratio to rise to 24% in 2020.

▪ We estimate the broad debt of Jilin GG amounted to RMB1.1 trillion at the end of 2019 and resulted in a debt to revenue ratio of 276%. We project that this Contacts will possibly hit 300% in the next two years. The GG is loading up on debt quickly to meet expanding fiscal expenses in a bid to boost its economy. We Primary Analyst anticipate that the higher debt burden will weigh on the GG if revenues do not

Name Jameson Zuo gain steam in the next few years. Title Associate Direct +852 3615 8341 ▪ We predict the Jilin GG’s will possess sufficient liquidity over the next 12 to 24 Email [email protected] months. The government had a fiscal deposit of RMB45 billion at the end of 2019, a decent scale relative to its revenue and debt service. Besides, despite its relatively heavy debt burden, we believe the GG has not stretched its Secondary Analyst financing capacity to an extreme extent so it will maintain a certain level of fund

Name Li Hu market access in the next two years. Title Analyst Direct +86 755 8321 0225 Email [email protected]

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Table 1: Key economic, budgetary, debt and liquidity data (RMB billion) 2015A 2016A 2017A 2018A 2019A 2020F

Economic Strength GDP Per Capita (RMB) 51,077 54,068 54,995 41,721 43,691 44,896 Real GDP Growth 6.3% 6.9% 5.3% 4.5% 3.0% 2.0% National Real GDP Growth 7.0% 6.8% 6.9% 6.7% 6.1% 2.0% Capital Formation Ratio 70.7% 68.7% 66.8% n.a n.a n.a Foreign Trade Dependence 8.4% 8.2% 8.4% 9.0% 11.1% n.a Inhabitants (Million) 27.5 27.3 27.2 26.8 26.9 n.a Total Dependency Ratio 29.7% 30.7% 32.7% 32.7% 36.7% n.a

Budgetary Strength GG Budgetary Balance -30 -46 -46 -61 -82 -104 Budgetary Balance as % GG Rev. -9.0% -12.8% -12.2% -15.6% -20.0% -23.9% Budgetary Balance as % GDP -2.2% -3.1% -3.1% -5.5% -7.0% -8.6% GG Budgetary Revenue 336 359 380 394 409 433 General Budgetary Rev. 297 317 328 337 341 350 share from Tax Income 29.2% 27.5% 26.1% 26.5% 23.4% 22.3% share from Non-Tax Income 12.2% 12.3% 10.9% 10.4% 9.4% 9.2% share from Refund and Transfer 58.5% 60.1% 63.0% 63.1% 67.2% 68.6% Government Fund Rev. 40 42 53 57 68 83 share from Land Sale Proceeds 65.4% 68.9% 78.7% 79.2% 87.5% 75.0% GG Budgetary Expenditure 366 405 427 455 490 537 General Budgetary Exp. 322 359 373 379 395 399 Government Fund Exp. 44 45 53 76 95 138 GG Budgetary Rev. Per Capita (RMB) 12,210 13,119 13,995 14,703 15,193 16,105 GG Budgetary Rev. Growth -1.2% 6.7% 6.1% 3.5% 3.8% 6.0% GG Budgetary Rev. as % GDP 23.9% 24.3% 25.4% 35.0% 34.9% 35.9%

Debt Burden Direct Debt(reported) 275 290 319 371 434 521 Debt Limit 302 331 369 417 482 579 Direct Debt/Debt Limit 91.2% 87.5% 86.6% 89.0% 90.1% 90.0% "Hidden Debt"(estimate) 392 467 550 630 693 752 Broad Debt(estimate) 667 757 869 1,001 1,128 1,272 Direct Debt/GG Rev. 81.9% 80.8% 84.0% 94.3% 106.3% 120.2% Broad Debt/GG Rev. 198.4% 211.1% 228.5% 254.2% 275.9% 293.6% Direct Debt/GDP 19.6% 19.6% 21.4% 33.0% 37.1% 43.1% Broad Debt/GDP 47.4% 51.2% 58.1% 88.9% 96.2% 105.3%

Liquidity Fiscal Deposit 40 47 51 41 45 50 Internal Liquidity Coverage Ratio n.a 0.3x 0.4x 0.5x 0.4x 0.3x Broad Liquidity Coverage Ratio n.a 1.4x 1.6x 1.7x 1.6x 1.4x Source: National Bureau of Statistics (NBS), local governments' bureaus, Ministry of Finance (MOF), People's Bank of China (PBOC), Wind, Pengyuan estimates.

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Rating Outlook

The stable outlook for Jilin reflects our expectations that China’s credit profile will remain stable and Jilin provincial government’s ability to manage its debt and budget will stay the same over the next 12 to 24 months. We would consider downgrading Jilin’s issuer credit rating if 1) there is a rating downgrade action by us on China; 2) the province’s creditworthiness deteriorates materially compared to its peers. We could consider upgrading Jilin’s issuer credit rating if 1) there is a rating upgrade action by us on China; 2) the province’s creditworthiness improves significantly compared to its peers on the aspect of economy, budgetary strength and debt burden. Economic Strength

 As an important old industrial base in China, Jilin boasts a strong industrial foundation but its economy seemed to be running low on steam in recent years. The adjustment of statistical metrics since the Fourth National Economic Census shrunk Jilin’s GDP to a large degree. The adjusted GDP was RMB1.17 trillion (US$167 billion) at the end of 2019, which meant its GDP per capita dropped to RMB43,691(US$6242) (exhibit 1). Ranking Jilin at the lower end among all the provincial-level regions.  In our view, an irrational economic structure and ineffective systems have dimmed Jilin’s economic development. GDP growth of the province has lagged behind the nation for years. However, we reckon that the Covid-19 pandemic has not damaged Jilin’s economy as fiercely as some other regions in 2020. The province reported just a 0.4% year on year contraction in its GDP in the first half of this year. The automobile manufacturing industry in particular grew nicely showing a 9.2% uptick in the first half. Given that this sector is a major component of the province’s industrial sector, we believe the boost in this industry will underpin Jilin’s GDP this year and help the province’s economic growth to keep up with the nation. That said, we do believe the concentration in Jilin’s economy may not bode well in the long run. The future economic prospects of Jilin should rely on the government’s efforts in economic reorientation and structural reform and improvement (exhibits 2 & 3).  The population in Jilin increased 0.3% in 2019, halting a continuous population decline since 2015 (exhibit 4). The population position of the province is still concerning, since a shrinking population will harm the province’s long-term economy in a number of ways. We will watch Jilin’s population status closely in the coming years.

Exhibit 1: GDP per capita and real GDP growth [RMB] Exhibit 2: GDP dependence ratios 80,000 8% 120%

100% 60,000 6% 80%

60% 40,000 4% 40%

20,000 2% 20%

0% 2015A 2016A 2017A 2018A 2019A 0 0% 2015A 2016A 2017A 2018A 2019A 2020F

GDP Per Capita-left axis National GDP Per Capita-left axis Foreign Trade Dependence Investment In Fixed Assets/GDP Real GDP Growth-right axis National Real GDP Growth-right axis

Source: NBS, local governments’ bureaus, Pengyuan estimates. Source: Local governments’ bureaus, Pengyuan estimates.

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Exhibit 3: Economic structure (2019) Exhibit 4: Population [Million] Real Estate, Construction, Wholesale 27.6 45% 7% 7% and Retail, 6% 27.4 40% 35% Transport, Other Services, 27.2 Storage and 30% 26% Postal 27.0 25% Services, 5% 26.8 20% 15% Finance, 7% Hotels and 26.6 Catering, 2% 10% 26.4 5% Industrial Sector, 29% 26.2 0% Farming, Forestry, 2015A 2016A 2017A 2018A 2019A Animal Husbandry Inhabitants-left axis and Fishery, 11% Total Dependency Ratio-right axis

National Total Dependency Ratio-right axis

Source: Local governments’ bureaus, Pengyuan estimates. Source: NBS, local governments’ bureaus, Pengyuan estimates. Budgetary Strength

 Though the Jilin GG has shown some feeble revenue growth and its fiscal deficits have expanded in recent years, it has been backed by the central government. Since local business activity and industrial sectors have been relatively less vibrant, tax and non-tax fees growth has slowed jointly declining 10% or so in 2019. Furthermore, as a consequence of the Covid-19 pandemic, the GG’s tax and non-tax fees jointly fell 8.7% year on year in the first half of 2020. The refunds and transfers from the central government have acted as a crucial pillar in propping up the GG’s revenue and accounted for a significant 67% of Jilin GG’s general public revenue in 2019 (exhibits 5 & 6). This allowed the GG’s budgetary revenue to show single digit growth in recent years but this revenue growth could not offset parallel expenditure growth, so the deficit has been growing.  The GG’s government fund revenue and expenditure jumped 23% and 80.9% year on year respectively in the first half of 2020. We reckon the GG is speeding up land sales and hastening its expenditure. This should fuel the GG’s revenue growth this year while further boosting the GG’s deficit. We expect to see a -24% budgetary balance to revenue ratio of the Jilin GG in 2020 (exhibit 7).  Our calculations show that the gap between Jilin’s GG budgetary revenue per capita and the local government’s average has been widening in recent years. Since the GG’s revenue is not showing any signs of gaining momentum, we believe this gap will likely persist for the next few years. (exhibit 8).

Exhibit 5: General government’s budgetary revenue [RMB billion] Exhibit 6: Composition of general budgetary revenue 500 40% 100%

400 30% 80%

300 20% 60%

200 10% 40%

100 0% 20%

0% 0 -10% 2015A 2016A 2017A 2018A 2019A 2020F 2015A 2016A 2017A 2018A 2019A 2020F share from Refund and Transfer share from Non-Tax Income GG Budgetary Rev.-left axis Growth-right axis share from Tax Income as % GDP-right axis

Source: Local governments’ bureaus, Pengyuan estimates. Source: Local governments’ bureaus, Pengyuan estimates.

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Exhibit 7: General government’s budgetary balance [RMB billion] Exhibit 8: General government’s budgetary revenue per capita [RMB] 0 0% 20,000 18,000 -20 -5% 16,000

-40 -10% 14,000 12,000 -60 -15% 10,000 8,000 -80 -20% 6,000 -100 -25% 4,000 2,000 -120 -30% 0 2015A 2016A 2017A 2018A 2019A 2020F 2015A 2016A 2017A 2018A 2019A 2020F GG Budgetary Balance-left axis as % GG Rev.-right axis Jilin Local Government's Avg.

Source: Local governments’ bureaus, NBS, Pengyuan estimates. Source: Local governments’ bureaus, MOF, NBS, Pengyuan estimates. Debt Burden

 In our view, the Jilin GG has piled on debt quickly and its debt burden has become heavier in recent years. The Jilin GG’s direct debt surged 17% to RMB434.5 billion at the end of 2019, or 90% of the provincial debt ceiling set by the central government (exhibit 9). We estimate that the province’s potential contingent liabilities from local government financing vehicles (LGFVs) and state-owned enterprises (SOEs) could reach up to RMB693 billion at the end of 2019. Thus, the broad debt of Jilin GG could be around RMB1.1 trillion that year. The GG’s debt growth is fast relative to its fiscal revenue and economic growth and this lifted its debt to revenue and GDP ratios up to 276% and 96% respectively by the end of 2019 (exhibit 10).  We expect the GG will raise more debt to meet its expanding fiscal expenses in the future and its debt to revenue ratio could possibly hit 300% in the next two years.

Exhibit 9: Broad debt (estimate) [RMB billion] Exhibit 10: Debt to GDP and to general government’s budgetary revenue 800 92% 350% 120%

700 91% 300% 100% 600 90% 250% 80% 500 89% 200% 400 88% 60% 150% 300 87% 40% 100% 200 86% 20% 100 85% 50%

0 84% 0% 0% 2015A 2016A 2017A 2018A 2019A 2020F 2015A 2016A 2017A 2018A 2019A 2020F Direct Debt(reported)-left axis "Hidden Debt"(estimate)-left axis Direct Debt/GG Rev.-left axis Broad Debt/GG Rev.-left axis Direct Debt/Debt Limit-right axis Direct Debt/GDP-right axis Broad Debt/GDP-right axis

Source: Local governments’ bureaus, NBS, Pengyuan estimates. Source: Local governments’ bureaus, NBS, Pengyuan estimates. Liquidity

 We predict the Jilin GG will possess sufficient liquidity over the next 12 to 24 months. The government had a fiscal deposit of RMB45 billion at the end of 2019, a decent scale relative to its revenue and debt service. Besides, despite having a debt burden heavier than most of its peers, we believe the GG has not stretched its financing capacity to an extreme. It will maintain a certain level of fund market access in the next two years. Our calculations show that the broad liquidity coverage ratio of the Jilin GG will be 144% and 143% in 2020 and 2021 respectively, indicating a favorable solvency position.

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Table 2: Liquidity analysis

(RMB billion) 2020F 2021F Source of Liquidity

Fiscal Deposit at beginning1 45 50

Direct Debt Funding Capacity 194 178

Budgetary Surplus 0 0

Other Liquidity Sources 0 0

Internal Liquidity Source 45 50

Broad Liquidity Source 239 228

Need of Liquidity

Debt Interest Payments 12 17

Debt Principal Payments 50 33

Budgetary Deficit 104 109

Other Liquidity Uses 0 0

Total Liquidity Need 166 159

Internal Liquidity Coverage Ratio 0.3x 0.3x

Broad Liquidity Coverage Ratio 1.4x 1.4x

Note: 1. Fiscal Deposit at beginning(yeart) = Fiscal deposit (end of yeart-1) Source: PBOC, local governments’ bureaus, Wind, Pengyuan estimates. Peer Comparison

Economic Strength Comparison

Exhibit 11: Chinese provincial regions' GDP per capita and real GDP growth [RMB] GDP Per Capita(2019)-left axis National GDP Per Capita(2019)-left axis GDP Growth(2015-2019)-right axis National GDP Growth(2015-2019)-right axis 168,000 12%

140,000 10%

112,000 8%

84,000 6%

56,000 4%

28,000 2%

0 0%

Source: NBS, local governments’ bureaus, Wind, Pengyuan estimates.

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Exhibit 12: Chinese provincial regions' composition of GDP (by expenditure approach) (2017) 218% Net Export Ratio Capital Formation Ratio 200% Consumption Ratio National Capital Formation Ratio

150%

100%

50%

0% -25% -55% -85% -118%

Source: NBS, local governments’ bureaus, Wind, Pengyuan estimates.

Budgetary Strength Comparison Exhibit 13: Chinese provincial regions' general government’s budgetary revenue per capita and budgetary balance to revenue ratio [RMB] Budgetary Rev. Per Capita(2019)-left axis LG Avg. Budgetary Rev. Per Capita(2019)-left axis 63,630 Bugetary Balance/Rev.(2017-2019)-right axis LG Avg. Budgetary Balance/Rev.(2017-2019)-right axis 0% 43,266 42,485 -5% 33,000

27,500 -10% 22,000

16,500 -15%

11,000 -20% 5,500

0 -25%

Source: MOF, local governments’ bureaus, NBS, Pengyuan estimates.

Exhibit 14: Chinese provincial regions' general government’s budgetary revenue (excluding refunds and transfers) to local GDP ratio (2016-2018)

30% Provincial Region Local Governments' Avg.

25%

20%

15%

10%

Source: MOF, local governments’ bureaus, NBS, Pengyuan estimates.

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Exhibit 15: Chinese provincial regions' component of general budgetary revenue (2018) Share from Tax Income Share from Non-Tax Income Share from Refund and Transfer LG Avg. Share from Tax Income 100%

80%

60%

40%

20%

Source: MOF, local governments’ bureaus, Pengyuan estimates.

Debt Burden Comparison

Exhibit 16: Chinese provincial regions' broad debt (2019) [RMB billion] 4,000 Direct Debt "Hidden Debt" 3,500

3,000

2,500

2,000

1,500

1,000

500

Source: MOF, local governments’ bureaus, NBS, Pengyuan estimates.

Exhibit 17: Chinese provincial regions' debt to general government’s budgetary revenue ratio (2019) 400% Direct Debt/GG Rev. "Hidden Debt"/GG Rev. LG Avg. Direct Debt/GG Rev. LG Avg. Broad Debt/GG Rev.

320%

240%

160%

80%

Source: MOF, local governments’ bureaus, NBS, Pengyuan estimates.

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Exhibit 18: Chinese provincial regions' debt to local GDP ratio (2019) 150% Direct Debt/GDP "Hidden Debt"/GDP LG Avg. Direct Debt/GDP LG Avg. Broad Debt/GDP 140% 120%

100%

80%

60%

40%

20%

Source: MOF, local governments’ bureaus, NBS, Pengyuan estimates.

Liquidity Comparison

Exhibit 19: Chinese provincial regions' average deposit coverage ratio (2020-2021) 39.3x Provincial Region Local Governments' Avg.

3.7x

2.4x

2.0x

1.6x

1.2x

0.8x

0.4x

0.0x

Source: PBOC, MOF, local governments’ bureaus, Wind, Pengyuan estimates.

Exhibit 20: Chinese provincial regions' average internal liquidity coverage ratio (2020-2021) Provincial Region Local Governments' Avg. 7.6x 1.9x 0.8x

0.6x

0.4x

0.2x

0.0x

Source: PBOC, MOF, local governments’ bureaus, Wind, Pengyuan estimates.

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Exhibit 21: Chinese provincial regions' average broad liquidity coverage ratio (2020-2021) Provincial Region Local Governments' Avg. 9.3x 4.8x 3.6x 2.1x

1.8x

1.5x

1.2x

0.9x

0.6x

0.3x

0.0x

Source: PBOC, MOF, local governments’ bureaus, Wind, Pengyuan estimates.

Province Background

 Jilin is an inland province in northeastern China, bordering Russia and North Korea, located at the centre of Northeast Asia. It is regarded as an important northern window of the One Belt and One Road initiative, the Chinese government’s project to connect China with other countries via infrastructure projects. The eastern end of Jilin is only 15 kilometres from the Japan Sea and four kilometres from Russia’s Posyet Bay. The province covers an area of 187,400 square kilometers, accounting for 1.94% of China’s land area.  Jilin is one of the three northeast provinces of China that were regarded as the “cradle of new China’s industry” up to the 1990s. Sadly, all three provinces face the same challenges like a cold climate, slowing economic growth and a shrinking population. Accordingly, the central government has put forward a strategy of reviving the Northeast Old Industrial Base and has come up with several measures in an attempt to reignite the economic development of the region.  Because of its past development history, Jilin boasts a solid industrial base and currently enjoys an advantageous position in China’s automobile industry. Jilin is also a significant grain production base as it is located in the world- renowned Golden Corn Belt and Golden Rice Belt. Jilin has led the country in some agriculture-related indicators such as grain occupancy per capita and corn export for years.  The provincial capital Changchun is the only city in Jilin that has a GDP per capita higher than that of the nation. The other cities are generally less developed with lackluster economic and budgetary performance.

Table 3: Prefecture-level cities in Jilin (2019)

Real GDP GDP Per Resident1 GG Budgetary GG Budgetary GG Rev. Per Capita (RMB billion) GDP Growth Capita (RMB) (Million) Rev. Exp. (RMB) Changchun 590.4 3.0% 78,323 7.5 126.4 141.9 16,768

Jilin 141.6 1.5% 34,402 4.1 20.6 22.8 5,015

Songyuan 73.0 2.6% 26,064 2.8 21.2 30.2 7,586

Siping 79.6 4.5% 25,031 3.2 9.5 9.8 2,984

Yanbian KAP 72.3 2.2% 34,928 2.1 33.1 44.0 15,990

Tonghua 72.6 4.3% 32,991 2.2 26.8 33.2 12,168

Liaoyuan n.a. 1.0% n.a. 1.2 13.5 14.5 11,208

Baishan n.a. 3.8% n.a. 1.2 17.4 22.6 14,944

Baicheng 49.1 0.0% 26,117 1.9 25.2 26.0 13,399 Note: 1, The registered population. Source: local governments’ bureaus, Wind, Pengyuan estimates.

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Rating Scores Summary

Economic Strength Score Stage of Economic Development Below Average Growth Performance Below Average Economic Concentration Notching down 1 Quality of Economic Statistics Notching down 0.5 Budgetary Strength Score Budgetary Balance Below Average Revenue Strength Below Average Revenue Growth Below Average Debt Burden Score Debt Level Below Average Debt Growth Below Average Liquidity Score Liquidity Coverage Average Governance and Fin. Management Score Budgetary Management Below Average GRE Management Average Transparency Average Accountability Average Additional Adjustment Factors Unique Importance of LG to HLG Neutral Weaker Willingness to Pay Neutral Notching Down From HLG's ICR -3 Indicative Credit Score (ICS) a Local Government's FC ICR A

Note: rating mentioned above are unsolicited. Related Criteria

Chinese Local Government Rating Criteria (29 June 2018)

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Appendix Ⅰ Major calculation indicators

Indicator Calculation formula GDP per capita Local GDP/ residents (population) General budgetary revenue + government fund revenue, including GG’s budgetary revenue transfers and refunds from higher-level government General budgetary expenditure + government fund expenditure, including GG's budgetary expenditure outflows transferred to higher-level government GG's budgetary revenue per capita GG's budgetary revenue/ residents (population) GG's budgetary balance GG’s budgetary revenue - GG’s budgetary expenditure GG's budgetary balance to revenue ratio GG's budgetary balance/ revenue x 100% GG's budgetary revenue (excludes transfers and refunds)/ GG's Budget self-sufficiency ratio budgetary revenue x100% General budget revenue final accounts/ budgets General budget revenue final accounts/ budgets x100% General budget expenditure final accounts/ budgets General budget expenditure final accounts/ budgets x100% Government fund budget revenue final accounts/ budgets Government fund budget revenue final accounts/ budgets x100% Government fund budget expenditure final accounts/ budgets Government fund budget expenditure final accounts/ budgets x100% GG's broad debt Direct debt + hidden debt (Fiscal deposit at the end of last year)/ (debt principal and interest Deposit coverage ratio payments) (Fiscal deposit at the end of last year + GG's budgetary surplus)/ (GG's Internal liquidity coverage ratio budgetary deficit + debt principal and interest payments) (Fiscal deposit at the end of last year + GG's budgetary surplus + direct Broad liquidity coverage ratio debt funding capacity)/ (GG's budgetary deficit + debt principal and interest payments)

Note: Unless otherwise specified, the above-mentioned data are data for the current year.

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