Fears grow over Chinese local government debt risk

China’s local governments have channelled their debt through off-balance sheet financing vehicles that leave creditors little recourse to repayment in the event of default. Calls to reform this system could result in the formation of a municipal bond market open to international investors. Alex Monro reports

China escaped the financial crisis and subsequent global economic slump largely unscathed. While the US and Europe made inevitable cuts to their orders of goods from China, Beijing plugged the difference in gross domestic profit (GDP) growth by launching grand investments in infrastructure. Increasingly, however, there is concern over what – if anything – will pick up the slack when that stimulus is withdrawn at the end of 2010.

As a country with a trade surplus and a healthy fiscal revenue-to