Forex News – Moody’s warned China’s credit outlook could turn negative based on high debt

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Ratings agency Moodys’ rattled markets today by announcing that China is in deeper debt than had been previously estimated.

“China’s local government debt may be 3.5 trillion yuan ($540 billion) larger than auditors estimated, potentially putting banks on the hook for deeper losses that could threaten their credit ratings”, Moody’s said on Tuesday.

Markets are concerned that that slower growth in the world’s second-biggest economy could set off a wave of loan defaults and cripple its banking system.

“Banks’ exposure to local government borrowers is greater than we anticipated,” Yvonne Zhang, a Moody’s analyst, said in a statement.

Moody’s warned that China’s credit outlook could turn negative if Beijing does not come up with a solution soon.

“Heightened negative sentiment over China’s growth outlook following Moody’s raising concerns over the Chinese banking sector has contributed to an overall pick-up in risk aversion, which has helped the dollar pick up a bid,” said Lee Hardman, currency strategist at BTM-UFJ.

Meanwhile, there is increasing speculation that China will raise interest rates by this weekend, which does not bode well for growth outlook and weighed down on risk appetite.

Chinese Premier Wen Jiabao was quoted saying “Chinese annual inflation is widely expected to hit 6 percent in June from May’s 34-month-high of 5.5 percent, prompting anticipation of another interest rate rise as early as this weekend. Some factors driving up prices have been controlled, but not eliminated. Stabilising the overall price level remains the top priority.”