China’s local government debt may be 3.5 trillion yuan (US$540 billion) larger than auditors estimated, potentially putting banks on the hook for deeper losses that could threaten their credit ratings, Moody’s said yesterday.
Moody’s reviewed a report released by China’s state auditor last week, which found that local governments had chalked up 10.7 trillion yuan of debt. Moody’s said it identified more loans funded by banks after accounting for discrepancies in figures given by various Chinese authorities.
Investors worry the pile of loans, about half of which were racked up during a 2008 stimulus spending binge, could destabilize the Chinese economy in the long run. If banks have to absorb heavy losses, it could restrict lending.
“We assume that the majority of loans to local governments are of good quality, but based on our assessment of the loan classifications and risk characteristics ... we conclude that banks’ exposure to local government borrowers is greater than we anticipated,” Moody’s analyst Yvonne Zhang said.
The ratings agency said a jump in local government loan defaults could push the non-performing loan ratio for Chinese banks as high as 12 percent, well above its base-case scenario that envisions losses in the range of 5 percent to 8 percent.
Unless China comes up with a “clear master plan” to clean up the problem, the credit outlook for Chinese banks could turn negative, Moody’s said.
The agency said it expected Beijing to “implement gradual discipline” over the stock of government debt and that would involve the Chinese government leaving banks to manage a part of problem loans on their own.
Many investors have long eyed China’s mountain of local government debt as a major risk. The worry is that slower growth in the world’s second-biggest economy could set off a wave of loan defaults and hobble its banking system.
About half of the debt dates back to the 2008 financial crisis when Beijing unveiled a 4 trillion yuan fiscal stimulus package that compelled local authorities to spend their way back to economic health.
However, the legacy of the massive spending is now catching up with China as maturity dates for the loans, many of which are due in 2013, draw closer.
While most loans were used to build roads and other infrastructure that some analysts say China needs, it has also generated some wasteful spending.
For the most part, investors have assumed that cash-rich Beijing would step in to soak up losses if needed, but some analysts are starting to flag the chance of banks paying for a part, or even all, of the losses.
“There is political risk here and concern of a tail-risk event. While the likelihood is very slim, the risk here is that the central government steps away from these loans,” said Mike Werner, a bank analyst at Bernstein Research in Hong Kong.
Some analysts said local governments still have options available for ensuring the debts don’t go bad, such as selling assets or extending loan maturity dates.
Moody’s said it derived the additional 3.5 trillion yuan of debt after comparing the estimate of China’s state auditor with that of the bank regulator.
A magnitude 7.0 earthquake struck off Yilan at 11:05pm yesterday, the Central Weather Administration (CWA) said. The epicenter was located at sea, about 32.3km east of Yilan County Hall, at a depth of 72.8km, CWA data showed There were no immediate reports of damage. The intensity of the quake, which gauges the actual effect of a seismic event, measured 4 in Yilan County area on Taiwan’s seven-tier intensity scale, the data showed. It measured 4 in other parts of eastern, northern and central Taiwan as well as Tainan, and 3 in Kaohsiung and Pingtung County, and 2 in Lienchiang and Penghu counties and 1
A car bomb killed a senior Russian general in southern Moscow yesterday morning, the latest high-profile army figure to be blown up in a blast that came just hours after Russian and Ukrainian delegates held separate talks in Miami on a plan to end the war. Kyiv has not commented on the incident, but Russian investigators said they were probing whether the blast was “linked” to “Ukrainian special forces.” The attack was similar to other assassinations of generals and pro-war figures that have either been claimed, or are widely believed to have been orchestrated, by Ukraine. Russian Lieutenant General Fanil Sarvarov, 56, head
FOREIGN INTERFERENCE: Beijing would likely intensify public opinion warfare in next year’s local elections to prevent Lai from getting re-elected, the ‘Yomiuri Shimbun’ said Internal documents from a Chinese artificial intelligence (AI) company indicated that China has been using the technology to intervene in foreign elections, including propaganda targeting Taiwan’s local elections next year and presidential elections in 2028, a Japanese newspaper reported yesterday. The Institute of National Security of Vanderbilt University obtained nearly 400 pages of documents from GoLaxy, a company with ties to the Chinese government, and found evidence that it had apparently deployed sophisticated, AI-driven propaganda campaigns in Hong Kong and Taiwan to shape public opinion, the Yomiuri Shimbun reported. GoLaxy provides insights, situation analysis and public opinion-shaping technology by conducting network surveillance
‘POLITICAL GAME’: DPP lawmakers said the motion would not meet the legislative threshold needed, and accused the KMT and the TPP of trivializing the Constitution The Legislative Yuan yesterday approved a motion to initiate impeachment proceedings against President William Lai (賴清德), saying he had undermined Taiwan’s constitutional order and democracy. The motion was approved 61-50 by lawmakers from the main opposition Chinese Nationalist Party (KMT) and the smaller Taiwan People’s Party (TPP), who together hold a legislative majority. Under the motion, a roll call vote for impeachment would be held on May 19 next year, after various hearings are held and Lai is given the chance to defend himself. The move came after Lai on Monday last week did not promulgate an amendment passed by the legislature that
RSS