China has US$6 trillion in hidden debts with ‘titanic’ credit risks, S&P says
Ratings agencies warn of a ‘debt iceberg’ accumulated by local governments as Beijing tries to curb unauthorised borrowing
China’s local governments may have accumulated 40 trillion yuan (US$6 trillion) worth of “hidden debts” that are not reflected in official figures, which is “a debt iceberg with titanic credit risks” to the world’s second biggest economy, S&P Global Ratings said in a report.
If all that off-the-books debt – mostly borrowed by local government financing vehicles, known as LGFVs – were included in China’s debt figures, the ratio of all government debt to GDP could have reached “an alarming level” of 60 per cent in 2017, the ratings agency said.
The 60 per cent line is highlighted in the Treaty of Maastricht, a founding document of the European Union, to discipline fiscal spending of its member countries. Meanwhile, the US and Japan have much higher government debt levels, which exceeded 100 and 200 per cent respectively this year, according to data from the International Monetary Fund.
According to official figures released by the Chinese Ministry of Finance, local governments had combined outstanding debts of 17.7 trillion yuan (US$2.5 trillion) at the end of August, although Beijing has admitted the existence of “hidden debts” and attempted to curb unauthorised borrowing by local authorities.
China’s state-owned banks told to stop lending to local governments as debt crackdown intensifies
According to the S&P report, penned by analysts led by Gloria Lu and Laura Li, the hidden debts make defaults by Chinese LGFVs more likely, creating a “formidable task” for China’s top leadership to manage the aftermath – for now China has a record of zero LGFV defaults, although a few bond defaulters are linked to local government entities.
S&P did not mention whether the finding would lead to a review of China’s sovereign rating.
