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 been dampened by the reorienting and restructuring of the local economy but Province Background ..................... 10 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] 18 September 2020 Page | 1 RA04050200004 Public Finance China 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. 18 September 2020 Page | 2 RA04050200004 Public Finance China 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.