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Press Release: Fitch: China LRG Data Manipulation Highlights Oversight Problems

23 Jan 2018 6:16 am
 
 
The following is a press release from Fitch Ratings: 
 

Fitch Ratings-Hong Kong/Singapore-23 January 2018: Recent admissions of data falsification by some Chinese local and regional governments (LRGs) highlight governance weaknesses within the sector and add to uncertainty over reported fiscal data, says Fitch Ratings. We will continue to monitor developments and take rating action, as appropriate, if further examples come to light. That said, the central authorities' efforts to expose data manipulation by LRGs could lead to improved management practices and internal control in the long run, if sustained.

Inner Mongolia revised down its 2016 general public budget revenue by 26% on 3 January, admitting that its previous figures were manipulated. Liaoning province reportedly admitted falsifying four years of economic data in early 2017. Meanwhile, the National Audit Office stated in December 2017 that 10 city and county governments had been found to be inflating their fiscal revenue by a total of CNY1.5 billion. However, these LRGs so far exposed for data manipulation represent only a small proportion of the 44,000 LRGs across the country.

Revisions of fiscal data can affect our assessment of the creditworthiness of an LRG by altering its financial profile and exposing weaknesses in data robustness and governance. We would normally take rating action if the falsification is significant, and this would also have consequences for any rated government-related entities which are credit-linked to that LRG.

In the case of Inner Mongolia, we downgraded our internal assessment of the autonomous region's creditworthiness, which in turn led to a downgrade of Inner Mongolia High-Grade Highway Construction and Development Company's (IMHCD) rating to 'BBB-' from 'BBB' which was credit-linked to the autonomous region. We have also placed IMHCD on Rating Watch Negative to reflect further assessment of the revised data of the autonomous region when this becomes available.

Local and regional governments globally do not have internationally accepted accounting policies in place, and each country can have different practices for presenting and auditing accounts. In China, Fitch relies on official fiscal data from provincial and local administrations, which are then approved by the local peoples' congress. Recent falsification by provincial governments may highlight shortcomings in this auditing process, particularly in terms of central government oversight. In most countries, central governments regularly conduct formal account audits at the higher regional government level.

We would expect recent data manipulation problems to prompt a focus on tighter supervision, including stronger and more transparent reporting requirements and stricter disciplinary measures to discourage falsification. The central authorities are also beginning to shift away from assessing local officials in a way that prioritises economic growth, and toward broader measures of performance. For example, more weight is being put on environmental targets and preserving financial stability, with senior leadership announcing last year that local officials will be held permanently accountable for the debt they occur while in office. Local officials have previously had strong incentives to overstate GDP growth and revenue in order to improve their own career prospects.

Contact:

Terry Gao

- Senior Director

- International Public Finance

- + 852 2263 9972

- Fitch (Hong Kong) Limited

- 19/F Man Yee Building

- 68 Des Voeux Road Central

- Hong Kong

Fernando Mayorga

- Managing Director

- International Public Finance

- +34 93 323 8407

Dan Martin

- Senior Analyst

- Fitch Wire

- +65 6796 7232

Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
 

(END) Dow Jones Newswires

January 23, 2018 01:16 ET (06:16 GMT)
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