China uncovers $84-bn fudging in local government debt

China has uncovered 531bn yuan ($84billion) of irregularities in local government debt, which analysts say reflects an attempt by local administrations to disguise their bad loans.

The breaches included "irregular credit guarantees", "irregular collateral" and "fraudulent and underpayment of registered capital" said the National Audit Office.

According to official data, a debt of 10.7 trillion yuan ($1.7trillion) was shown  in 2010.

"The state council is studying proposals to enhance local government debt management and to address fiscal and financial risks," the audit office said in the report.

In July last year, Moody had warned that Chinese banks could face negative credit outlook after identifying 540 billion (RMB 3.5 trillion) of loans that the Chinese auditors did not discuss in their report, ''Growing Size of Local Government Debt Burden Challenges Chinese Banks''. (See: Chinese banks could face negative credit outlook: Moody's)

"When cross-examining the findings by the June 27 NAO report -- in conjunction with reports from Chinese banking regulators -- we find that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion," said Yvonne Zhang, a Moody's vice president and one of the authors of the report.