Business / Markets

Moody's calls transparency key to success

By Zheng Yangpeng (China Daily) Updated: 2014-07-01 07:38

"Let's say you have a low debt level today, but you also have a massive building program. It makes a difference. Ratings are supposed to be forward-looking, not just focused on today," she said.

The challenge in China is that governments use cash accounting rather than accrual accounting. As an alternative to cash accounting, accrual accounting recognizes economic events regardless of when cash transactions occur. So when a government signs a contract with a developer, for example, the value is classified as a liability of the government, even though it hasn't yet made any cash payment.

Moody's calls transparency key to success
"We spend a lot of time trying to standardize metrics and to understand how we can compare among entities across countries, because almost every country in the world, sometimes even within the same system, has different accounting systems," she said.

The good news is that the Ministry of Finance has already ordered local governments to make fiscal plans spanning several years, including three-year projections and introduce accrual accounting, which will enable raters to give projections.

Roane stressed it is progress for local governments to release financial statements, but what matters more is the quality of the statements. The devil is in the details, as it were.

In China, one issue is that the total debt has not been consolidated. It's thus a mounting challenge to assess the debts of 154,000 borrowers - local governments, government affiliates and local government financing vehicles - across the nation.

Another issue, which has become more severe over the past three years, is that the 154,000 borrowers rely on various nonbanking institutions to raise debt.

In 2010, when the National Audit Office conducted the first nationwide survey, there was no debt that had been raised through trust products; by 2013, when the second survey was conducted, 7 percent of debt had been raised in that form.

The latest development is debt financing by LGFVs disguised as equity investment. This has made it even more challenging to understand the real indebtedness, according to Roane.

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