Moody's joins Fitch in downgrading China outlook as local debt soars

Moody's joins Fitch in downgrading China outlook as local debt soars

Moody's Investors Service has joined Fitch Ratings in downgrading China's government debt because of runaway municipal borrowing, Reuters reports.

Local government financing vehicles stand accused of making investments in vanity projects and ghost cities that are unlikely to produce sufficient returns to pay off bank loans. China's National Audit Office (NAO) estimated that debt of local and central governments last year was CNY15 trillion (US$2.4 trillion) to CNY18 trillion, equal 29 to 35 per cent of GDP.

Chinese banks, borrowers and lenders have reportedly collaborated in deploying off-balance sheet financing that regulators say conceals and complicates the risk bad loans pose in the wider economy, said Reuters.

Moody's kept its China bond rating at Aa3, but downgraded the outlook from "positive" to "stable". Fitch Ratings cut China's long-term local currency credit rating to A-plus from AA-minus.

"Progress has been less than anticipated in the process of both reducing latent risks by making local government contingent liabilities more transparent and in reining in rapid credit growth; therefore, some of the upward pressure on the Aa3 rating has eased," said Moody's.

What saved its Aa3 rating, said Moody's, was China's credit fundamentals, which have underpinned robust economic growth, strong central government finances and a strong external payments position.

"Only a handful of highly rated advanced industrial economies - such as Norway, Switzerland, Japan, Hong Kong and Singapore - have a stronger international investment position," said Moody's.