Ratings agency Moody’s Investors Service said that bank loans to local governments in China may pose a greater-than-expected threat to the country’s banking system. China’s main government auditor, the National Audit Office, may have underestimated the amount of bank loans to local governments by $540 billion, Moody’s said. Unless there is a clear plan to reduce local-government debt, Moody’s could downgrade China’s banking system to negative. China’s National Audit Office in June issued a report that estimated the country’s total local-government debt to be RMB10.7 trillion (USD1.65 trillion) as of end-2010. However, Moody’s said that report did not account for about RMB3.5 trillion (USD540 billion) in local government loans that are “most likely poorly documented and may pose the greatest risk of delinquency.” A spokesperson for Moody’s said that the delinquency ratio for those loans will be about 50 to 75 percent. Moody’s said that this new debt figure could bring the nonperforming loans in the Chinese banking system up to 8 to 12 percent of total loans. China’s official ratio of nonperforming loans at the end of 2010 stood at 1.14 percent.

China on Wednesday raised interest rates in a bid to cool the country’s red hot economic growth and tame inflation. The 25 basis point hike to key lending and deposit rates was the fifth increase in nine months and the latest sign that Chinese policymaker remain worried about inflation. Consumer prices rose 5.5 percent in May and many economists believe that June’s inflation data, to be released next week, may top 6 percent. Beijing has also instructed China’s banks to curtail lending and has raised the reserve-requirement ratio for lenders 12 times since early 2010. There are signs that these measures have helped China moderate the pace of economic growth, but market watchers also believe China may not have more room for further interest rate hikes or increases to the reserve requirement ratio.

June passenger vehicle sales in China rose 6.2 percent year over year to 1.11 million units, according to the China Association of Automobile Manufacturers. Passenger vehicle sales for the month rose 6.1 percent from May, while sales from the January to June period increased 5.8 percent year over year to 7.11 million units.  Total auto sales in June rose 1.4 percent year over year to 1.44 million units.

India’s merchandise exports for June rose 46.4 percent year over year to USD29.2 billion. Imports rose 42.4 percent to USD36.9 billion. The trade surplus declined to USD7.7 billion from USD15 billion in May. India has targeted USD300 billion in merchandise exports for the fiscal year ending March 2012. Separately, private equity firms stepped up their investment in India in the second quarter. Investments rose 45 percent to USD2.92 billion, according to data from Venture Intelligence. The second quarter number is higher than the USD1.99 billion reported in the first quarter of 2010, but 15 percent lower than the USD3.36 billion reported in the first quarter of this year.