China's mounting local government debt poses a grave financial risk

Chinese leaders are planning a range of measures to address the risks posed by local government debt, including special bond issuance, debt swaps, loan rollovers, and potentially dipping into the central budget. Local governments in China have accumulated significant debt due to over-investment in infrastructure, declining returns from land sales, and the impact of the COVID-19 pandemic. The extent of Beijing's involvement and the conditions attached to it are still uncertain, but economists believe that decisive and long-lasting measures are necessary to address the municipal debt crisis. The central government may instruct state-owned banks to roll over maturing debt, while local governments could issue bonds to swap for off-balance sheet debt. Beijing may also issue low-cost bonds to replace local debt. However, profound changes to the Chinese economy will be needed to prevent the problem from recurring in the future.