China local government debt understated by $540 billion: Moody's

China local government debt understated by $540 billion: Moody's

* Moody's warns China banks credit outlook may turn negative

* Moody's says Beijing may ask banks to manage problem loans

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.

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Looks like China might not be as financially sound as the world thinks. This is just local debt to the tune of 1/2 trillion dollars. China has been taken to task several times now for the manner in which they report on their finances. I am curious if this might also be the case at their top level of government as well.

In addition to questionable financial reporting and practices (currency manipulation) its been suspected that they also misrepresent their military budget as well.

This reminds me of the book The Bear and the Dragon from Tom Clancy. In the book the Chinese engaged in capitalist practices, however they mixed it with a communist ideaology of just printing more money whenever they needed it. In the book the Chinese misrepresented their monetary and reserve monetary supplies.

This is starting to mimic the book....

Sounds like a bubble to me, just a matter of time.

Originally posted by lokdog
Sounds like a bubble to me, just a matter of time.

Im wondering if this is why they went on the shopping spree with european debt?

Robbing Peter in order to pay Paul?

China's vast size and resources aren't immune to the bottom-up nature of pyramid-scheme capitalism.

Good quote from comment: "The Chinese have always been copycats, now they are copying our (US) stupidity."