Moody's: Chinese gov't debt still manageable

China's government debt level is manageable but local authority arrears and contingent liabilities are much higher than those at end of 2010, which is credit negative, rating agency Moody's Investors Services has said.

In a report released Monday covering the auditing results on government debt by China's National Audit Office (NAO), Moody's claimed that a large accumulation in local authority arrears will be a burden on and carry risks to central government finances.

The NAO said last week that liabilities directly carried by governments at various levels stood at 20.7 trillion yuan (3.4 trillion U.S. dollars) at the end of June, up 8.6 percent -- or 1.63 trillion yuan -- from the end of 2012.

Debt guaranteed by governments at various levels amounted to 2.93 trillion yuan at the end of June. Contingent liabilities stood at 6.65 trillion yuan.

In breakdown, direct central government debt stood at 9.81 trillion yuan at the end of June. The remaining 10.89 trillion yuan was borrowed by local governments, an increase of 13 percent (1.25 trillion yuan) from the end of 2012.

The Moody's report claimed that direct debt has grown beyond the capacity of many local governments to service it, and the central administration may need to provide additional fiscal resources to local authorities to bolster their finances and debt-repayment capacity.

Over the past year, the market has been worried by China's rising debt burden and leverage, and there has been no official update since 2011 when the NAO put local government debt at around 10.7 trillion yuan at end of 2010.

The NAO's report also shows that the maturity structure of local authority debt is relatively short term, thereby suggesting that general government gross financing needs will further increase, Moody's said.

However, the accumulation of combined local and central government direct debt has been offset to a considerable degree by the rapid rise in nominal GDP (gross domestic product) growth, it said.

Moody's estimates that the large accumulation of local government contingent debt pushed the total direct and indirect arrears level to a much higher around 50 percent of GDP in June 2013.

But such a level is still manageable and future payment capabilities will be enhanced if China's GDP growth remains relatively strong at around 7 percent per year over the next five years, said the U.S. rating agency.

Ultimately, the sustainability of the debt build-up will also depend largely on progress in implementing "growth-enhancing supply-side reforms" to offset the downside pressures on economic growth, it said.

Another important aspect of the new audit is that its greater transparency reduces uncertainty over the actual level of indebtedness for local governments, Moody's added.