China's upper-tier local governments face risks due to lower-tiers' debt buildup

Credit risks from some weak tier-three local governments may migrate upwards.

Much of the spending burden for China's local public services will continue to fall on tier-two and tier-three local and regional governments (LRGs), according to S&P Global Ratings

S&P Global Ratings believes some of these credit risks, particularly those from some weak tier-three LRGs, may find ways to migrate upwards.

Tier-three LRGs have seen the greatest fiscal deterioration in recent years whilst upper tiers have been much more immune or have even seen improved fiscal performances.

"Exposures may also come via local state-owned enterprises (SOEs)," said S&P Global Ratings credit analyst Christopher Yip. "Lower-tier-owned SOEs are more likely to face repayment risk, and in rare cases, this can require upper-level LRGs to provide support via upper-level SOEs or financial institutions," he added.

China's "hidden debt" reform will move these off-budget obligations onto local government balance sheets--improving transparency but creating higher official debt.

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