Moody's: Chinese regional and local governments' credit profiles weaken on falling land sales

Moody's Investors Service says that the fiscal and debt metrics of Chinese regional and local governments (RLGs) are under pressure from a decline in land sales triggered by the country's economic slowdown. 

"In this environment, some RLGs may seek to offset the decline through more efficient management of their fiscal resources, while others may take advantage of improved RLG access to bond financing and bank loans, thereby increasing their debt levels," says Nicholas Zhu, a Moody's Vice President and Senior Analyst. 

"Furthermore, RLG tax receipts and central government transfers that depend on tax collection are unlikely to compensate for falling land sales, as revenues from these sources are likely to also slow in line with the broader Chinese economy," adds Zhu. 

Moody's conclusions are contained in a just-released report titled "Falling Land Sales to Weaken Chinese RLGs' Credit Profile," and is authored by Zhu. 

Moody's notes that the RLGs' proceeds from land sales - which accounted for 23.8% of their total revenues of RMB17.9 trillion in 2014 - had fallen 34.7% year-on-year to RMB2 trillion in the first three quarters of 2015. This result compares with growth of 3.1% and 45% in 2014 and 2013 respectively. 

Moody's says that the deterioration will weigh on the RLGs' revenues and weaken their fiscal and debt metrics. And, if sustained over the next 2-3 years, the decline in land sales could have a material impact on the RLG sector's creditworthiness. 

Furthermore, national investment growth slowed to 10.3% year-on-year in the first three quarters of 2015, compared with 15.7% in the same period of 2014, partly because of this fall in the proceeds from land sales. 

RLGs are responsible for much of China's infrastructure investment and rely largely on land sales to fund it. 

At the same time, Moody's does not see a near-term rebound in land sales, while a recent stabilization of the housing market is unlikely to lead to a rapid recovery in land sales, as housing inventory levels remain very high.