Moody's says outlook for China local governments negative due to high SOE debts

BEIJING, Dec 3 (Reuters) - Moody’s Investors Service said on Monday its outlook for China’s regional and local governments is negative due to high debt levels of local state-owned enterprises (SOEs), which have been tasked to seek new capital for infrastructure projects.

The liabilities of local SOEs - including local government financing vehicles - rose to 60 trillion yuan ($8.67 trillion) as of end-October, Moody’s said.

That is more than triple the total direct debt of regional and local governments (RLGs) and equivalent to almost three-quarters of China’s 2017 gross domestic product, it added.

“The liabilities of local SOEs will continue to grow, as the RLGs’ infrastructure spending needs outweigh their limited capacity to borrow funds directly,” Amanda Du, senior analyst at Moody’s, wrote in a report.

Beijing has pledged to expand investment in infrastructure such as railways, highways and airports to help shore up growth in the world’s second-largest economy.

That places pressure on local governments to secure the funding that they need to launch infrastructure projects.

Local government finances are already facing challenges this year as budgetary revenue slows due to a nationwide cut in taxes and fees and volatility in land sales, a major source of revenue.

Local governments have almost exhausted their annual quotas for new debt issuance after ramping up bond sales in the third quarter. As a result, they are leaning on local SOEs to fund their infrastructure spending.

But their propensity to use local SOEs to fund their infrastructure spending generates contingent liabilities, with weaker SOEs posing larger potential liabilities for the RLGs, Moody’s said.

China says it will establish a system enabling financial institutions to take action against SOEs when their debt-asset ratios exceed warning levels, which range from 60 to 70 percent depending on the sector. ($1 = 6.9221 Chinese yuan renminbi) (Reporting by Ryan Woo; Editing by Kim Coghill)