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S&P: Chinese local governments' hidden debt could be as high as US$6 trillion

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S&P: Chinese local governments' hidden debt could be as high as US$6 trillion

Hidden debt accumulated by China's local governments could be as high as 40 trillion yuan, or US$6 trillion, with much of that debt taken by local government financing vehicles, or LGFVs, for infrastructure development, said S&P Global Ratings in a report published Oct. 15.

While the amount of debt that Chinese local governments keep off their balance sheets is not known, it could be as high as 30 trillion yuan to 40 trillion yuan, or US$4.5 trillion to US$6.0 trillion, or even more, S&P said. "And that's a debt iceberg with titanic credit risks," it noted.

As of the end of 2017, China's outstanding government debt on balance sheets totaled 29.95 trillion yuan. Including hidden debts, the ratio of government debt to GDP could have reached an alarming level of 60% in 2017, the rating agency said. Given the sheer size of the off-balance-sheet debt, China probably needs a decade or more to address it, S&P noted.

S&P expects Chinese government support for LGFVs to weaken over time as they transition into normal state-owned enterprises, noting that the default risk of such entities is on the rise. Although the willingness of local governments to keep their financing vehicles afloat may be still high, their ultimate capacity to provide timely support could be constrained, the agency said.

The S&P report came as an ongoing trade dispute between China and the U.S. is likely to affect the country's economic output in the coming months, the Financial Times reported. Further, China's economic growth is expected to slow down amid a reform push in the banking sector that has tightened access to credit through off-balance-sheet channels.

As of Oct. 15, US$1 was equivalent to 6.92 Chinese yuan.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings documents referred to in this news brief can be found here.