Ratings agency Moody’s warned on Tuesday that China may have understated the debt load of local governments by US$541 billion, the Financial Times reported. In its first ever audit of local governments, the central government announced that provinces, cities and counties owed a total of US$1.65 trillion. At the time the news was received positively, with analysts complimenting Beijing for its transparency and noting that the debt seemed manageable. But Moody’s, which upgraded China’s sovereign debt rating last year, said it believed that the audit may have missed many problematic loans which were not properly underwritten and therefore could not strictly be classified as government obligations. Moody’s said these loans could total US$541 billion, and that as many as three-quarters of them could be non-performing. If the estimate is accurate, it would mean the potential non-performing loan ratio in the Chinese banking system is between 8-12%, as opposed to just over 1% now. “We conclude that the potential scale of problem loans at Chinese banks may be closer to our stress case than our base case. This is clearly a negative trend for creditors,” said Yvonne Zhang, one of the authors of the report. However, Zhang said that she does not anticipate a downgrade of Moody’s stable outlook for Chinese lenders.