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Chinese Local Government Debt More Than Estimated: Moody's

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Moody's said Tuesday that the total debt owed by local Chinese governments may be 3.5 trillion yuan ($540 billion) more than Beijing's auditors estimated, meaning that its banks could be liable for losses large enough to jeopardize their credit ratings.

In a Reuters report, Moody's said that China's state auditor has said debt levels for local governments were around 10.7 trillion yuan. However, in reviewing discrepancies in the numbers given by a range of Chinese authorities, the ratings agency has come to the conclusion that exposure is considerably higher—high enough to put the banks in the danger zone.

In a statement, Moody's said, "The potential scale of the problem loans at Chinese banks may be closer to its stress case than its base case." The ratio of nonperforming loans for Chinese banks thus could be as high as 8-12%. The base case percentage range is 5-8%; the stress case range is 10-18%.

Given the difference, the agency said that the banks' outlook could change to negative, unless Beijing comes up with a "clear master plan" to address local government debt.

Investors have been concerned about the level of local government debt in China, and various government agencies have all tried to reassure them. However, each of three major agencies has used different criteria in its review of the situation; differing definitions and accounting methods have resulted in differing forecasts from the state auditor, the central bank and the bank regulator.

According to Moody's, the additional amount of 3.5 trillion yuan was revealed in a comparison of the bank regulator's figures with those of the state auditor, and was likely disregarded because it was thought not to be made up of real claims on local governments.

Yvonne Zhang, a Moody's analyst, said in the report, "This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency." Moody's expects Beijing to "implement gradual discipline" over the debt; that would include leaving banks to handle at least some of their problem loans themselves.


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