Moody's warns on China's local government debt

Local government debt poses a key risk for Chinese banks, Moody's said Wednesday, the latest warning amid growing jitters of financial risks in the world's second largest economy.

The rating agency said in a report that many local government financing vehicles (LGFVs) have seen their cash flow stagnate or decline, while their debt levels have risen.

Among 388 city construction companies Moody's surveyed, only 53 percent of them have sufficient cash to cover estimated debt and interest payments in 2013 without resorting to borrowing more.

Meanwhile, the National Audit Office said on June 10 that the debt of 36 local governments had risen 12.9 percent to 3.85 trillion yuan in the two years to the end of 2012.

"The direct exposures of Chinese banks to LGFVs remain significant despite the central government's recent efforts to limit the growth of LGFV borrowing," the report said, adding that LGFV exposures accounted for 14 percent of total Chinese bank loans at the end of 2012.

While many LGFVs depend on government support to fulfill their debt obligations, local governments are now facing more challenges to cushion possible defaults.

Chinese local governments' revenue growth is slowing down, which will constrain their support capacity. Also, regulators' restriction on shadow banking and property development will also squeeze local governments' money pipelines, according to Moody's.