China's audit of government debt credit positive: Moody's

China's audit of government-related debt obligations is credit positive, as it will improve the transparency of the country's local government debt, Moody's said in a Thursday report.

However, the agency warned that thorough accounting may reveal that local governments carry debt burdens beyond previous estimates.

According to Moody's calculations, China's local government debt was 12.1 trillion yuan (1.97 trillion U.S. dollars) as of the end of 2012.

The National Audit Office (NAO) announced a nationwide audit of government-related debt last Sunday. According to NAO, local government debt totaled 10.7 trillion yuan as of the end of 2010.

In June, NAO published a survey of 36 local governments' debts, which rose 12.9 percent from 2010 to the end of 2012.

Moody's believes the central government will impose additional restraints on the borrowing of local government financing vehicles (LGFVs).

"This may introduce some short-term volatility in debt markets and trigger related liquidity pressure, thereby increasing the refinancing risk for LGFVs," the report said.

"Balance sheet adjustments by local governments will mean a curtailment of investment and add further downward pressure on China's economic growth," it added.