Chinese local debt understated by $540 billion: Moody's

BEIJING Tue Jul 5, 2011 7:15am EDT

A Chinese national flag can be seen hanging down a deserted hutong, Chinese for small alley, near Beijing's Tiananmen Square July 1, 2011. REUTERS/David Gray

A Chinese national flag can be seen hanging down a deserted hutong, Chinese for small alley, near Beijing's Tiananmen Square July 1, 2011.

Credit: Reuters/David Gray

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BEIJING (Reuters) - China's local government debt burden may be 3.5 trillion yuan ($540 billion) larger than auditors estimated, putting banks on the hook for deeper losses that could threaten their credit ratings, Moody's said on Tuesday.

Addressing the estimate by China's state auditor that its local governments have chalked up 10.7 trillion yuan of debt, Moody's said it found more potential loans after accounting for discrepencies in figures given by various Chinese authorities.

"The potential scale of the problem loans at Chinese banks may be closer to its stress case than its base case," Moody's said in a statement.

In view of that, the non-performing loan ratio for Chinese banks could be as high as 8-12 percent, compared with 5-8 percent in the base case and 10-18 percent in the stress case.

Unless China comes up with a "clear master plan" to clean up its pile of local government debt, the credit outlook for Chinese banks could turn negative, the ratings agency said.

In a bid to assuage investor worries about the potential souring of its massive local government debt, different Chinese authorities including the state auditor, the bank regulator and the central bank have tried to assess the situation.

But all three agencies have used different definitions and accounting methods to review the debt, resulting in a hodgepodge of official forecasts.

Moody's said it derived the additional 3.5 trillion yuan of debt after comparing the estimates of China's state auditor with that of the bank regulator's.

The ratings agency said the Chinese state auditor likely omitted the 3.5 trillion yuan of debt from its assessment because they were not considered as real claims on local governments.

"This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency," said Yvonne Zhang, a Moody's analyst.

Moody's said it expects Beijing to "implement gradual discipline" over the stock of government debt, and that would involve the Chinese government leaving banks to manage a part of the problem loans on their own.

(Reporting by Koh Gui Qing; Additional reporting by Kim Coghill in Singapore; Editing by Jacqueline Wong)

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Comments (4)
kc10man wrote:
No surprise here. Chinese economics are much more about faith, than fact.

Jul 04, 2011 11:09pm EDT  --  Report as abuse
Moody’s lost the ability to count properly (pun intended) a few years ago. Their comments belong on the comedy pages.

Jul 05, 2011 2:41am EDT  --  Report as abuse
jrj90620 wrote:
China is a country based on a dishonest,fiat currency,just like the U.S. and the rest of the world.Any problems with too much debt will be taken care of by just devaluing the currency.That’s what every other country in history,with dishonest currencies,have done.

Jul 05, 2011 12:10pm EDT  --  Report as abuse
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