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Moody's raises red flag over China's public finances

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Concerned about China's policy flip-flops, sputtering manufacturing sector, or swooning equity market? Add to that another source of worries: The patchy state of regional finances.

Moody's Investors Service notes that China's regional and local government (RLG) debt pile grew by more than one-third between June 2013 and end-2014, citing official data.

In the 18 months between June 2013 and end-2014, RLG debt rose to 24 trillion yuan ($3.7 trillion) from 17.9 trillion yuan, according to government statistics published over the weekend. Twenty-four trillion yuan is equivalent to 38 percent of the country's gross domestic product (GDP) in 2014, according to Moody's.

Moody's underlying concern is that debt levels are rising against a backdrop of falling revenues, potentially making it more difficult for RLGs to fulfill their repayment obligations.

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"Rising debt levels weaken the RLGs' credit profiles, leaving them exposed to the effects of China's slowing economy and the related weakening in revenues, against the backdrop of falling land sales," the ratings agency wrote in a report.

Between January and July 2015, China's slower growth rates lowered the RLGs' budget revenue growth to 9 percent from 11 percent during the same period in the previous year.

"Seven provinces experienced falling revenues, 18 saw single-digit revenue growth, while only six achieved double-digit revenue growth," Moody's said.

Land sales, meanwhile, fell by 38 percent in the seven months to 31 July versus 3 percent growth in the same period in 2014, and 45 percent growth in the corresponding period in 2013.

To be sure, not all China watchers were alarmed by the rise in debt levels.

Yang Zhao, China economist at Nomura says while 24 trillion in total debt as of end-2014 is slightly higher than his earlier estimate of 22.6 trillion yuan, is still a "manageable level of general government debt risk."

Incorporating central government debt of 9.6 trillion yuan, and about 5.1 trillion yuan of "other" debt -such as that of railway companies and asset management companies - the bank estimates overall government debt at about 60.8 percent of GDP as of end-2014.

"This level is not particularly large by international standards," he said.