MercoPress. South Atlantic News Agency

Spending spree of local governments reflects in Chinese banks bad debts

Chinese banks overexposed warns Moody’s

Bad debts held by local governments in China are a far bigger problem than first estimated, credit ratings agency Moody’s warned on Wednesday.

Chinese banks had lent 8.5 trillion Yuan (1.3tn US dollars) to the local governments in 2010 in an attempt to boost growth. However, the agency said the debt burden could be 3.5tn Yuan larger than auditors had estimated.

It warned that bad debt could reach between 8% and 10% of the total loans.

”When cross-examining the findings by the 27 June National Audit Office (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 3.5tn Yuan“ said Yi Zhang of Moody's.

Ms Zhang explained that since these loans were not covered by the NAO, they were not considered as real claims on local governments by the audit agency.

”This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency,” she added.

Moody's warned that given the scale of the problem, the credit outlook for China's banking sector could turn to negative.