China’s Colossal Hidden-Debt Problem Is Coming to a Head - WSJ

China is trying to defuse a time bomb in the form of hidden local government debt that could damage its banking system, as Moody's downgraded the country's credit rating outlook, The Wall Street Journal reports.

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cities and provinces across China have reportedly accumulated a huge amount of hidden debt after years of uncontrolled borrowing and spending. The International Monetary Fund and Wall Street banks estimate that total outstanding off-balance sheet public debt is between 7 7 trillion and.11 trillion. This includes corporate bonds issued by thousands of so-called local government financial institutions that have borrowed money to build roads, bridges, and other infrastructure, or to finance other expenses.

"no one knows what the actual amount is, but over the past year it has become clear that the level of local government debt has become unacceptable, " the newspaper writes.

China's economic growth is said to be slowing, and the country is grappling with deflationary pressures that will make it harder for local governments to handle interest payments and principal debt.

economists say that a significant portion of hidden debt (estimated to range from.400 billion to мільярдів 800 billion) is particularly problematic and at high risk of default.

the Chinese authorities realized that the risks to the country's financial stability and overall economic growth had become too great to be ignored. They are trying to solve the problem more systematically and are beginning to replace part of the hidden debt with a new – and explicit – public debt, the article notes.

it is said that a wave of defaults can spread losses everywhere. This could quickly escalate into a nationwide financial crisis if credit markets stall and retail and corporate savers start worrying about the financial stability of banks that hold large amounts of local government bonds.

according to Wind, a financial data provider, local government bonds account for almost half of China's domestic corporate bond market, and defaults can lead to other borrowers ' funding being cut off if many bond investors and buyers step back.

in early November, China's central government said it attached "great importance to preventing and eliminating the risk of hidden local government debts." Bankers and local government officials have also been warned that they will be held liable for life if they create new hidden debts.

Mr. Gongsheng, governor of the people's Bank of China, said at a Financial Forum in Beijing last month that the central bank will also provide emergency liquidity support to regions with a relatively high debt burden. He said China's total public debt is small by international standards and that the country is taking steps, including selling assets and refinancing debt, to mitigate the risk associated with local government debt.

on Tuesday, Moody's Investors Service downgraded China's credit rating outlook from stable to negative, as the country is likely to provide additional support to local governments and state-owned enterprises experiencing financial stress. The credit rating company also highlighted the risks to China's economic growth. Moody's awarded China an investment grade A1 rating, which is four steps lower than the highest Triple A rating.