China is trying to defuse a financial time bomb that could severely damage its banking system.
Cities and provinces across the country have accumulated a massive amount of hidden debt following years of unchecked borrowing and spending. The International Monetary Fund and Wall Street banks estimate that the total outstanding off-balance-sheet government debt is around $7 trillion to $11 trillion. That includes corporate bonds issued by thousands of so-called local-government financing vehicles, which borrowed money to build roads, bridges and other infrastructure, or to fund other expenditures.
No one knows what the actual total is, but it has become abundantly clear over the past year that local governments’ debt levels have become unsustainable. China’s economic growth is slowing and the country is battling deflationary pressures that will make it harder for local governments to keep up with their interest and principal payments.
Economists say a significant chunk of the hidden debt—their estimates range from $400 billion to more than $800 billion—is particularly problematic and at high risk of default……………………………..