China's local govts to rely on SPBs amid debt containment policies

June 26, 2024 (MLN): Fitch Ratings expects Chinese local and regional governments (LRGs) to continue to rely on special purpose bonds (SPBs) to finance infrastructure investment under the central government’s policy shift towards containing debt risk at local-government financing vehicles.

The allocation of new SPB quota is increasingly concentrated in China’s more developed regions, which have stronger capability to shoulder the mission of driving economic growth.

The top-10 provinces for SPB issuance, including Guangdong, Shandong and Zhejiang, accounted for around 61% of total new issuance in 2023.

We estimate that more than 85% of matured SPBs were refinanced in 2023. This may be due to duration mismatch, as policy projects usually have a longer operation period than the duration of SPBs, which averages at 11 years.

In addition, if the projects cannot generate sufficient return for debt servicing, LRGs might face heightened pressure to further subsidise them.

The total outstanding balance and interest expense of SPBs have been climbing since 2018. We estimate the SPB interest expense reached 7.7% of capital expenditure in 2023.

Should the expense exceed 10% of capital expenditure, it may trigger fiscal adjustments for LRGs, including cutting new investment and asset disposals.

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