Moody’s says Chinese local government debt is $540 billion larger than stated

According to the independent assessment made by Moody’s, China’s local government debt burden may be larger by 3.5 trillion yuan ($540 billion) than estimated by local auditors which places banks on the hook for deeper losses that could threaten their credit ratings.

Addressing the estimate by China's state auditor that its local governments have chalked up 10.7 trillion yuan of debt, Moody's said it found more potential loans after accounting for discrepancies in figures given by various Chinese authorities.

"The potential scale of the problem loans at Chinese banks may be closer to its stress case than its base case," Moody's said in a statement.

Taking this into consideration it may be said that the non-performing loan ratio for Chinese banks could be as high as 8-12 percent, compared with 5-8 percent in the base case and 10-18 percent in the stress case.

Unless China comes up with a "clear master plan" to clean up its pile of local government debt, the credit outlook for Chinese banks could turn negative, the ratings agency said