'TITANIC RISKS': S&P warns of China's hidden debt that will take decades to address

(Oli Scarff / Getty Images)
  • Research from S&P Global suggests the amount of debt in China’s shadow banking system could now exceed officially reported debt.
  • The ratings agency said it will take “decades” for China to address the buildup of debt that local governments hold off their balance sheet.

The level of debt in China’s shadow banking system may have reached “alarming” levels, according to ratings agency S&P Global.

Reuters reports that data compiled by S&P indicates China’s hidden debt could have reached 60% of Chinese GDP in 2017.

Many local governments in China raise debt and hold it off their balance sheet, in order to avoid lending limits imposed by central authorities.

At the end of 2017, the amount of debt that local government held on their balance sheet totaled 29.95 trillion yuan ($US4.3 trillion).

However, S&P estimated that hidden debt levels could exceed that, and may have reached as high as 30-40 trillion yuan.

“That’s a debt iceberg with titanic credit risks,” S&P said.

The S&P report said it will now take decades for China to fully address the buildup of risks in its shadow-banking system.

Chinese authorities have repeatedly vowed that they are taking action to reign in the amount of leverage in China’s shadow banking system.

At the same time, policy makers have also stepped up stimulus efforts as China’s economy transitions to consumption-based growth while it navigates through an escalating trade war with the US.

“We believe China’s recent measures to stabilize growth and boost liquidity in response to internal and external headwinds aren’t necessarily a relaxation of its de-risking efforts,” S&P said.

Amid the buildup of shadow debt, Reuters reports that the global ratings agencies have recently issued more credit downgrades on local government financial vehicles (LGFVs) in China.

But global ratings agencies have been quick to downgrade issuers linked to Chinese regional and local governments. Moody’s also cut its rate of five different LGFVs, which issue debt financing for non-bank corporate firms and infrastructure projects.

There’s more at Reuters here.

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