Rating Agency Finds 10% Of Chinese Gdp Is Bad Debt, Claims "china Debt Problem Bigger Than Stated"

[interestrateripoff]

http://www.zerohedge.com/article/moodys-july-4-bomb-rater-finds-10-chinese-gdp-bad-debt-claims-china-debt-problem-bigger-stat

The timing on the earlier pronouncement that rating agencies may have found religion could not have been better. Not even an hour later, here comes Moody's with a blockbuster which may put China's "White Knight" status, at least as far as Europe is concerned, in grave danger. In a report just released, the rating agency not only warns that China's debt problem is "bigger than stated" (i.e., China is hiding a ton of ugly stuff off the books), but goes ahead to quantify it: "Of the RMB 10.7 trillion (about $1.6 trillion) of local government debt examined by the Chinese audit agency, RMB 8.5 trillion ($1.3 trillion) was funded by banks. However, Moody's has identified another potential RMB 3.5 trillion ($540 billion) of such loans that the Chinese auditors did not discuss in their report....we find that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion." Naturally, the implication is that this is an absolutely willing "omission" (thank you central planning), which means that of China's $5.8 trillion GDP (or whatever imaginary number the Polit Bureau is happy with throwing around for mass consumption), $540 billion is debt that is "unaccounted for", most likely due to being, well, bad. That would be equivalent to saying that $1.4 trillion of US corporate debt is delinquent. And lest anything is lost in translation, Moody's drives the steak through the Dragon's heart: "Since these loans to local governments are not covered by the NAO report, this means they are not considered by the audit agency as real claims on local governments. This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency." So let's get this straight: a country which has 10% of its GDP in the form of bad debt, is somehow expected to be credible enough to buy not only Greek debt, but the EURUSD each and every day? Mmmmk. In the meantime, Dagong downgrades the US to junk status in 5, 4, 3...

Full Moody's release:

"Moody's Investors Service says that the potential scale of the problem loans at Chinese banks may be closer to its stress case than its base case, according to an assessment that the rating agency conducted following the release of new data by China's National Audit Office (NAO).

When considering the apparent absence of a clear master plan to deal with this issue, Moody's also views the credit outlook for the Chinese banking system as potentially turning to negative.

"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, as provided by the NAO and other Chinese agencies, we conclude that the banks' exposure to local government borrowers is greater than we anticipated," says Yvonne Zhang, a Moody's Vice President and one of the authors of the report.

Of the RMB 10.7 trillion (about $1.6 trillion) of local government debt examined by the Chinese audit agency, RMB 8.5 trillion ($1.3 trillion) was funded by banks. However, Moody's has identified another potential RMB 3.5 trillion ($540 billion) of such loans that the Chinese auditors did not discuss in their report.

"When cross-examining the findings by the June 27 NAO report -- in conjunction with reports from Chinese banking regulators -- we find that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion," says Zhang.

"Since these loans to local governments are not covered by the NAO report, this means they are not considered by the audit agency as real claims on local governments. This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency," the analyst adds.

Moody's report estimates that the Chinese banking system's economic non-performing loans could reach between 8% and 12% of total loans, compared to 5% to 8% in the rating agency's base case, and 10% to 18% in its stress case.

In the report, the rating agency examines various scenarios as to how banks could tackle problem loans, including some where the government provides assistance, but Moody's generally expects the Chinese authorities to implement gradual discipline.

Excellent it appears that the rating agencies are now in a tit for tat war with each other. The Chinese rating agency downgrades US debt, the US rating agencies fight back dissing Chinese debt.

Got to love our debt is better than your debt arguments.

What would be good is seeing this compared to US/UK/EU debt figures.

[aa3]

For at least 13 years since I`ve been reading, US papers have been saying China is on the verge of a bad debt crisis. It of course never happens.

The reason for the misperception I believe is a misunderstanding of how debt and the economy work. Basically banks are insolvent at all times if you took a snapshot in time. If the economy was in stasis all the loans would not be able to be paid back.

But there is a delay factor. Loans are paid back over 15 or 25 years. In the intervening period there is economic growth and inflation making the relative cost of the debt payments less and less.

There is also the growth of cities. So say you finance a strip mall on the outskirts of a city. 10 years from now in a developing nation, that strip mall will be solidly inside the city, with a large surrounding population. So at first they are dealing with vacancy and high payments. But deeper into the loan with inflation, economic growth and such the payments become less and less.

Imo the problem in Western Nations is for a number of reasons the economy stopped growing. Real incomes weren`t rising. So that heavy debt burden was never lessened throughout the course of the loan. Causing real defaults.