A Closer Look at China’s LGFVs: Zhejiang April 2, 2020 Primary Analyst Key Takeaways Xiaoliang Liu Beijing — From our desktop analysis of 172 local government financing vehicles (LGFVs) within +86 10 6516 6040 Zhejiang Province, the median indicative issuer credit quality is higher than nationwide. xiaoliang.liu @spgchinaratings.cn — Our study shows Zhejiang has a strong economy and a robust fiscal position at the provincial level; however, local governments’ indicative ability to support related LGFVs Secondary Analysts still varies at the city level. Jin Wang Beijing — Compared to Jiangsu Province, more cities in Zhejiang have LGFVs with indicative +86 10 6516 6034 issuer credit quality above the provincial average, and in general their overall short- jin.wang @spgchinaratings.cn term debt burdens are relatively lower. Lianghan Wu — We expect the debt burden of LGFVs in Zhejiang may increase, as the growth rate of Beijing Zhejiang’s fixed asset investment has rebounded rapidly since 2018. +86 10 6516 6043 lianghan.wu @spgchinaratings.cn To get a full picture of Zhejiang Province’s LGFVs, we conducted a desktop analysis of 172 LGFVs Xiqian Chen Beijing with public bonds outstanding, using public information. We included city, district, and county +86 10 6516 6031 level LGFVs, and subway companies, but excluded provincial level LGFVs (like transportation xiqian.chen construction companies, investment holding companies and utility companies) in our samples. @spgchinaratings.cn Our sample accounts for about 80% of Zhejiang’s LGFV entities with outstanding public bonds Zhen Huang in the market. The LGFVs in our sample are located in 11 prefecture-level cities in Zhejiang. We Beijing believe that the sample is representative and provides a good gauge of Zhejiang’s indicative LGFV +86 10 6516 6032 credit conditions. zhen.huang @spgchinaratings.cn We believe local government support is generally the most important factor when we consider the indicative credit quality of LGFVs. In this report, we have analyzed the importance of LGFVs to local governments, and the local governments’ indicative ability to provide vehicles with support. We also conducted a comparative analysis of LGFVs between Zhejiang and Jiangsu. Zhejiang and Jiangsu have similar geographic locations and have both recorded strong economic performances; moreover, they are the two largest groups of LGFVs in terms of both number of issuers and the amount of outstanding bonds, so we believe they are comparable peers. S&P Global (China) Ratings www.spgchinaratings.cn April 2, 2020 A Closer Look at China’s LGFVs: Zhejiang April 2, 2020 Chart 1 Comparing Bonds Outstanding Among Zhejiang LGFVs and Nationwide 18,000 15,000 12,000 9,000 712.8 billion RMB 6,000 (100 million RMB) 3,000 0 Note: Data as of December 31, 2019. Source: Wind, S&P Global (China) Ratings. Copyright ©2020 by S&P Ratings (China) Co., Ltd. All rights reserved. About This Article S&P Ratings (China) Co., Ltd. (S&P China) has conducted a desktop analysis of a selection of entities based in the relevant region. We have chosen these entities based on their asset sizes, representativeness of most regions and availability of public information. The analysis contained herein has been performed using S&P China Methodologies. S&P China Methodologies and analytical approaches are intended specifically for use in China only, and are distinct from those used by S&P Global Ratings. An S&P China opinion must not be equated with or represented as an opinion by S&P Global Ratings, or relied upon as an S&P Global Ratings opinion. This desktop analysis has been conducted using publicly available information only, and is based on S&P China’s methodologies for corporates. The analysis involves a desktop application of our methodologies to public information to arrive at a potential view of credit quality across sectors. It is important to note that the opinions expressed in this report are based on public information and are not based on any interactive rating exercise with any particular entity. The opinions ex- pressed herein are not and should not be represented as a credit rating, and should not be taken as an indication of a final credit rating on any particular entity, but are initial insights of potential credit quality based on the analysis conducted. This desktop analysis does not involve any surveil- lance. The opinions expressed herein are not and should not be viewed as recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. We have conducted this desktop analysis on individual corporates and present the results contained herein at an aggregate group level. The different sections of this research show the statistics and performance of different groups of entities and the market more broadly against the metrics we generally consider most relevant under our methodologies. Given the desktop nature of this analysis, and that we have not conducted an interactive review with any particular entity, we may have made certain assumptions in lieu of confirmed informa- tion and where relevant we may also have attempted to consider any possibility of parent, group, government or other forms of potential support, to inform our view of potential credit quality. S&P China is not responsible for any losses caused by reliance on the content of this desktop analysis. S&P Global (China) Ratings www.spgchinaratings.cn 2 A Closer Look at China’s LGFVs: Zhejiang April 2, 2020 On the National Level: Zhejiang LGFVs Generally have Better Indicative Credit Quality The median indicative issuer credit quality of 172 LGFVs within Zhejiang is higher than the median indicative issuer credit quality of 1700 LGFVs at the national level. We believe this is mainly because LGFVs in Zhejiang benefit from local governments’ higher indicative ability to provide support. Chart 2 Indicative Credit Quality: Comparing LGFVs in Zhejiang and Nationwide [BBB]*category [BB]*category Zhejiang [A]*category China [B]*category [AA]*category and above Note*: The indicative credit quality distributions expressed in this report are only S&P China’s indicative views of credit quality derived from a desktop analysis based on public information without interactive review with any particular entity or the full credit rating process such as a rating committee. The opinions expressed herein are not and should not be represented as a credit rating and should not be taken as an indication of a final credit rating on any particular entity. Curve represents the proportion of companies in the sample. Source: S&P Global (China) Ratings. Copyright ©2020 by S&P Ratings (China) Co., Ltd. All rights reserved. Within the Province: Zhejiang LGFVs Show Certain Degree of Divergence in Indicative Issuer Credit Quality In our view, LGFVs cannot be differentiated based purely on their indicative standalone business and financial risk profiles, as their stand-alone credit profiles tend to be very similar. Government support is generally the major factor when we consider credit differentiation among LGFVs. We look at this from the perspective of a government’s indicative ability to support its LGFVs and an LGFV’s potential importance to its government. After considering factors like economic performance, budget, debt, liquidity and financial management, our study shows that not all of the 11 prefecture-level cities in Zhejiang are at the same pace, and we believe the local governments’ ability to support related LGFVs may vary. We expect Hangzhou and Ningbo to have a stronger ability to provide support when compared with other cities in Zhejiang; meanwhile, Zhoushan, Quzhou, Lishui, and Shaoxing may be relatively weaker. S&P Global (China) Ratings www.spgchinaratings.cn 3 A Closer Look at China’s LGFVs: Zhejiang April 2, 2020 The local government’s indicative ability to support LGFVs within Zhejiang Province is shown in Chart 2. We expect local governments with a darker color to have a stronger indicative ability to support LGFVs under their jurisdictions. In contrast, governments with a lighter color may have a relatively weaker ability to provide support. Chart 3 S&P Global (China) Ratings www.spgchinaratings.cn 4 A Closer Look at China’s LGFVs: Zhejiang April 2, 2020 We believe that the economic performance, budget and debt levels of cities in Zhejiang could differentiate local governments’ abilities to support related LGFVs. Hangzhou and Ningbo have very strong economies, while Zhoushan, Lishui, Quzhou, and Huzhou have seen weaker economic performance in the province. In terms of fiscal positions, Hangzhou and Ningbo show stronger fiscal revenue and better budgetary balance, while Lishui, Quzhou, and Zhoushan are weaker in both dimensions. Shaoxing’s economic performance is average for the province, but its indicative ability to support LGFVs is affected because it has a much higher debt burden than other cities in the province. Chart 4 Chart 5 S&P Global (China) Ratings www.spgchinaratings.cn 5 A Closer Look at China’s LGFVs: Zhejiang April 2, 2020 In addition to the governments’ indicative ability to support, the differences in the indicative issuer credit quality of LGFVs also depend on the LGFV’s potential importance to its local government. When analyzing support, we typically consider an LGFV’s importance by considering factors such as: its policy role; whether its business is not-for-profit or difficult to replace; revenue and asset scale; strategic importance, etc. In regions like Lishui and Quzhou, a smaller number of LGFVs are publicly funded. In our view, this may result in those LGFVs enjoying stronger government support as they tend to hold key mandates with an exclusive role. Meanwhile in regions like Hangzhou, Ningbo, Shaoxing, Huzhou and Jiaxing, there are more than 20 LGFVs per city. We assume that only a portion of LGFVs with core roles in these regions are likely to enjoy the strongest support from their related governments, while vehicles with duplicate functions are more dispersed among levels of potential importance.