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Moody's Warns on China Debt

Another Disaster in the Making?

Written by Brian Hicks
Posted July 5, 2011

Now that Greece is fixed – well, until September -- all eyes are on China, where bad debts held by local governments are a “far bigger problem than first estimated,” says Moody's.

China, which lent $1.3 trillion to local governments in 2010 to boost growth, could now be faced with a debt burden of 3.5 trillion yuan more than original estimates. And bad debt could reach as high as 10% of total loans.

Worse, since many of the loans were not covered by the National Audit Office (NAO), they are not considered as “real claims on local governments by the audit agency.” And that means some of the loans are “most likely poorly documented and may pose the greatest risk of delinquency.”

Moody's is warning that the credit outlook for China's banking sector could turn to negative, as a result.

But there is a glimmer of hope. Given the strong growth of China's economy and the fact that banks are starting to handle the debt problem, according to a Financial Times story, we may not see a downgrade of Moody's outlook.

It's a wait and see at this time.

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