By Vivienne Russell | 6 January 2013

Soaring levels of local government debt in China present a substantial risk to the nation’s public finances, credit ratings agency Moody’s has said.

A report published by China’s National Audit Office last week showed the amount of local government debt was much higher than it had reported in its first audit of local debt in June 2011. 

Commenting on this finding, Moody’s said central government may need to provide additional fiscal resources to local authorities to help bolster their finances and debt-repayment capacity.

‘Whether the new figures – as outlined in the report – reflect more thorough accounting procedures or an actual sharp rise in debt, or both, this sizable accumulation in local government debt will be a burden on and carry risks to central government finances,’ Moody’s said.

It went on to note that the accumulation of government debt in China – both local and national – has been partly offset by a rapid rise in economic growth. As a share of gross domestic product, debt rose from 34.1% in 2010 to 37.1% in 2013. However, Moody’s said, the large accumulation of local government contingent debt had pushed the total direct and indirect debt level to around 50% of GDP.

But the agency added: ‘Such as level is still manageable and future payment capabilities will be enhanced if China’s GDP growth remains, in accordance with out central scenario, relatively strong at around 7% per year over the next five years.’