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China’s bad debt problem ‘bigger than expected’

Bad debt held by Chinese local governments is a much larger problem than previously anticipated, Moody’s Investors Service claims.

A statement issued by the ratings agency adds the credit outlook for the country could turn negative if its government fails to deal with the potential scale of problem loans held to local authorities.

Moody’s published its report after analysing figures from China’s National Audit Office, which show that RMB 8.5 trillion (£820 billion) of local governments’ RMB 10.7 trillion debt is funded by banks.

Yvonne Zhang, a vice president at the agency, says the majority of these loans are assumed to be of “good quality” but suggests that banks’ exposure to local governments is greater than expected in the auditor’s report.

“When cross-examining the findings by the June 27 NAO report – in conjunction with reports from Chinese banking regulators – we find that the Chinese audit agency could be understating banks’ exposures to local governments by as much as RMB 3.5 trillion,” she explains.

Zhang adds that the exclusion of these loans from the NAO report means they are not regarded as real claims on local governments, which could suggest they are poorly documented and “may pose the greatest risk of delinquency”.

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