Asia Economy

China debt a risk but authorities are handling it: Moody's

Here's why China's bad debt is a big risk

High debt levels in China are a risk but an imminent global financial crisis-type implosion is unlikely, a Moody's Investors Service economist said Tuesday.

Concerns over China's debt buildup have risen in recent months amid a broader slowdown in the world's second-largest economy.

Influential investors such as Kyle Bass and George Soros have warned of a credit crisis in China, with Bass noting the presence of "ticking time bombs" in China's banking system.

These concerns have also been reflected in less enthusiastic assessments of China's creditworthiness in recent months.

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Moody's has a Aa3 rating—the fourth highest rating—on China's sovereign credit with a negative outlook. The outlook was placed in March 2016 due to rising government debt burden and "sizable contingent liabilities", Moody's said at the time. Peer Standard & Poor's also sliced China's rating outlook to negative in March.

Despite its warning, Moody's reckons authorities have a handle on the problem and will take steps necessary to steady the ship.

"Not only do the authorities know what the situation is, but they have the tools and the intention , the willingness to address the issue (of) high leverages," Moody's managing director Atsi Sheth told CNBC's "Squawk Box" on Tuesday.

"China's growth and its growth outlook is still quite robust. This is a low-income economy playing the catch-up model….A lot of China's debt is still domestically generated; there are domestic savings that led to this debt creation as opposed to foreign borrowing …. That gives it some stability and support," added Sheth.

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Still, with domestic credit around 200 percent of gross domestic product (GDP), the extent of China's debt is "very high" relative to other countries at similar levels, Sheth said.

According to Moody's, China's domestic debt is at 196.8 percent of GDP, a 53.2 percentage points increase over five years. China's external debt, however, is at 15.6 percent, rated "low" by Moody's.

Debt in sectors that are losing productivity gains, revenue growth or profitability will also find it difficult repaying debt, she added.

In a report released on Tuesday, Moody's noted that liabilities at state-owned enterprise (SOEs) are "particularly large".

In total, liabilities in China's SOE sector rose to around 115 percent of GDP in 2015 from under 100 percent in 2012, Moody's wrote, citing Ministry of Finance data.

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However, the total size of SOE liabilities overstates the degree of exposure for the country, added Moody's.

"Most SOEs are financially healthy and pose no risk of needing direct or indirect government support," Moody' said.

While one way of flushing out debt is to let defaults happen, China like every other government likely "doesn't want an escalating trend of defaults," said Sheth.

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