Local Governments in China May Have More Debt Than They Say

The rating agency Moody’s believes that the level of debt of local governments in China is 30% higher than the suggested figure in an official report published last week. It warns of the potential risk of default on some debts, and the placement of the Chinese banking system under a negative outlook.

The rating agency Moody’s has reviewed the actual level of debt incurred by local governments in China. Indeed, it has checked the report issued last week by the National Chinese audits, and sees “a greater problem than anticipated.” The agency estimated 10,700 billion yuan of debt, equivalent to 28% of GDP, the experts at Moody’s calculated – by comparing the figures in the report with official information provided by the Banks – the real figure was higher than 3,500 billion yuan, one third more than the formal evaluation.

For the rating agency, the review could lead to damage scores of communities, because of the greater number of defects that may occur in the near future. According to the official report, 70% of these debts must be repaid usually within the next five years. The risk of higher losses for creditors, especially if prices fell in real estate and continue to decline on land that has been pledged, is therefore more important. As a result, Moody’s warned that “the Chinese banking system can potentially be placed under negative outlook”, which could affect the country’s economic growth.

In addition, the rating agency said, “as the National Audit does not reflect these credits granted to local governments in its report, it means they are not considered as actual credit. The probable lack of information on these claims could mean that there is a significant risk.”

“The management of certain financial platforms (through which local governments borrow) is abnormal,” also noted last week Liu Jiayi, a former economist at the World Bank who became president of the agency audits.

There are many observers who see the local debt “a time bomb”. Beijing authorities for the moment remain discreet, even if they are aware of the problem, as evidenced by the publication of the first official report last week. In early June, local newspapers “revealed” that the central government to spend between 2,000 and 3,000 billion yuan over six months for the bailout of the banks in difficulty.