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 nations 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 Chinas state-run financial institutions and governments eager for economic growth. Ministry of Finance officials told the National Peoples 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 SASACs deputy director, Huang Shuhe, reportedly discussed rising risks for local government platforms with the State Council, Chinas cabinet.....