CHINA’S LOCAL DEBT

ANALYSIS: CHINA TO SEE BUMPY PATCH, BUT NO CRISIS, ON LOCAL DEBT

Jason Subler

Reuters, July 13, 2011

SHANGHAI (Reuters) - However you slice and dice it, a sizeable chunk of China's local government debt will likely go bad over the next few years. But that will not be anything the world's second-largest economy can't muddle through.

Something of a war of words has emerged over just how much China's provincial and city governments owe their creditors for the infrastructure and other projects they have rushed out over the past several years, helping their own economies flourish amid a global downturn.

Moody's last week issued a report saying an estimate by the country's audit office a week before had underestimated local government debt by some 3.5 trillion yuan ($540 billion).

The audit office this week spoke out in its own defense, saying doubts over its figures - which put such debt at 10.7 trillion yuan -- were "irresponsible."

The stakes, of course, are high.

Any wave of defaults big enough to destabilize the country's major banks or crimp the government's finances could have devastating consequences not only for the Chinese economy, but for global growth and financial markets as well.

The reality, however, is that China has significant flexibility and fiscal firepower to fend off the risks of such a shock to its economy, and will therefore probably be able to cushion the blow.

"Yes, there are going to be substantial losses from local government debt. But it's not going to happen immediately, all of a sudden, all together," said Tao Wang, an economist with UBS in Hong Kong.

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