China managed to bounce back from the global financial crisis and lead the world in economic growth thanks to a credit-fueled expansion by city and provincial governments across the country. They used vehicles known as local government financing platforms to issue bonds and borrow from banks.

Now that debt is starting to come due, testing the capacity of local governments to service several trillion yuan worth of outstanding bonds. The nation’s cooling economy, which is slowing the growth of local government revenues, will add to the financing strain. In coming months bond holders including state banks will likely have to choose to either roll over existing debts or push some entities into default.

The former choice is far more likely, analysts say, given close ties between China’s state-run financial institutions and governments eager for economic growth. Ministry of Finance officials told the National People’s Congress in March that the ministry would issue bonds this year to help local governments close an expected 350 billion yuan ($56 billion) gap between revenues and spending.

Nevertheless, bad-debt alarm bells have been sounded in recent months by other government agencies such as the State-owned Assets Supervision and Administration Commission, a powerful government agency that oversees all state-owned enterprises. In January SASAC‘s deputy director, Huang Shuhe, reportedly discussed rising risks for local government platforms with the State Council, China’s cabinet.

In March the China Banking Regulatory Commission (CBRC) ordered banks holding local government debt to stop lending to platforms with a debt-to-asset ratio above 80 percent. The agency also recommended that banks lend no more to platforms this year than in 2012 and cap their total outstanding debt, including bonds and loans, at the 2011 level of 9.1 trillion yuan.

Local government financing platforms have been around for years. They issue bonds to finance the construction of highways, subways, industrial parks and other projects. The pace of bond issuance accelerated rapidly after 2008, when the Ministry of Finance stopped requiring all government bond projects to first receive the ministry’s approval. Infrastructure spending helped the economy grow at an average annual rate of 9.6 percent between 2009 and 2011 and by 7.8 percent in 2012, according to the International Monetary Fund.

According to a recent report by Pengyuan Credit Rating Co., local government financing platforms issued 2.17 trillion yuan in bonds between 2008 and 2012. These bonds, which have maturities of five to seven years, represent a significant part of overall local government debt, which stood at 11.7 trillion yuan at the end of 2012, according to the Ministry of Finance.