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.