6 Jul 2011

Local govt bad debt seen as big problem

6:28 am on 6 July 2011

Moody's ratings agency has warned that bad debts held by local governments in China are a far bigger problem than first estimated.

The BBC reports Chinese banks lent 8.5 trillion yuan ($US1.3 trillion) to local governments in 2010 in an attempt to boost growth.

However, the agency said the debt burden could be 3.5 trillion yuan larger than auditors had estimated.

It warned that bad debt could reach between 8% and 10% of the total loans.

Moody's warned that given the scale of the problem, the credit outlook for China's banking sector could turn to negative.