China’s local government debt burden varies widely: Moody’s

Leslie Shaffer | Writer for
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Concerns over high levels of debt among local governments in China have mounted in recent months, but the quality and quantity of that burden varies widely by province, Moody's said.

"The provinces all show varying degrees of credit risk as their indebtedness levels differ significantly, from moderate to high," credit rating service Moody's Investor Service said in a report on Tuesday.

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China's state auditor said in a report in December that local governments owe almost $3 trillion in outstanding debt as of the end of June last year, up 67 percent from the last audit in 2011.

The debt pile is viewed as one of the biggest threats facing the country's economy and there are worries that much of it cannot be repaid as it was used to fund non-profitable projects.

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Among the top 31 upper-tier local governments reporting government-related debt on their websites, indebtedness ranged from 69 percent to 156 percent of revenues, with the median at 108 percent, Moody's said.

The median debt for all the provinces was 31 percent of their gross domestic products (GDP), but the levels ranged from 79 percent of GDP for Guinzhou province to 13 percent for Shandong.

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"While higher levels of debt are typically credit negative, the credit quality implications also depend on economic strength, budget flexibility, access to financing, and ability to repay," Moody's said.

"In addition to the debt figures, we need to understand an entity's ability to mobilize resources to repay its debt and the extent to which government-related entities have projects that generate streams of revenue sufficient to repay debt."

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Moody's said it was concerned about a lack of information on which financing vehicles and other entities are generating enough revenue to repay their debt without tapping the local government. It cited Beijing Infrastructure, which operates the capital's subway system, as an example of a company unable to operate without heavy subsidies.

It added that the term of the debt may be more important than the amount in assessing the default risks.

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"Higher levels of short-term debt are riskier because of interest-rate and market access risk," it said.

At the high end, Moody's estimates one province, Jiangsu, will see 34 percent of its outstanding debt mature in 2014, while at the low end, Hainan province has only 14 percent of its debt maturing this year, suggesting very different refinancing risks.

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How much of a province's revenue comes from land sales is another debt risk, Moody's said.

"While this revenue source has proven to be quite lucrative, it has also been highly volatile and therefore not a reliable source for debt repayment," it said. "Provinces and their cities that are more reliant on land sales may be more exposed."

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Even with the new data, the transparency of the debt remains a concern, with provinces creating new financing structures, such as trust products, to issue debt, Moody's said.

While banks are still the main source of financing for provinces at 57 percent of total financing, trusts and build-transfer structures now account for 16 percent of borrowing, Moody's said, with Shanxi province at the top end with 27 percent of its debt in trust products.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1