Problem loans at China’s banks are significantly worse than initially thought, according to Moody’s Investors Service’s news release on July 4th. This raises concerns already expressed about China’s continued ability to grow its economy at annual rates approaching double-digits. The weakness is so pervasive that Moody’s “views the credit outlook for the Chinese banking system as potentially turning to negative. ” It added:

We assume that the majority of loans [by the banks] to local governments are of good quality, but based on our assessment of the loan classifications and risk characteristics, as provided by the NAO [China’s National Audit Office] and other Chinese agencies, we conclude that the banks’ exposure to local government borrowers is greater than we anticipated…

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Photo: Bank of China Headquarters, Beijing, China.