Chinese rating agencies have upgraded a record number of local government bond issuers even as fiscal income plunged after the coronavirus outbreak, in a move analysts say could lead to a wave of defaults, reported the Financial Times.
The corporate credit ratings of 100 local government financing vehicles, the main lenders behind China’s infrastructure building boom, have been raised since January, according to Wind, a financial data provider. This marks a sharp rise, with just 17 reporting a rise in the previous ten years combined. The shift comes despite local governments reporting a 7.9% drop in revenues in the six months ending in June.
“We chose to ignore the disease because its short-term impact on growth is limited. We can downgrade these bonds later if the economic recovery fails to live up to our expectation,” said a director at China Chengxin International Credit Rating, which has upgraded 21 LGFVs since May.
However, analysts warned that the ratings changes could lead to a surge in defaults. “Local rating agencies made the adjustment in part because of LGFVs’ crucial role in rescuing the virus-hit economy but that doesn’t make risky bonds safer,” said Zhuang Bo, an economist at TS Lombard.