The Chinese Municipal Debt Crisis and Central Government Response
Over the past few decades China’s subnational governments (SNGs) have issued prodigious amounts of debt in order to fund the massive urbanization and industrialization movements that have taken place in the country. The central government has recently attempted to address this problem by creating a municipal bond market in the hopes of creating more transparent and efficient borrowing. However, there is a chance that the current levels of debt are unsustainable and that many SNGs will ask the central government for debt assistance via a bailout. If forced to make this decision, it is likely that the Xi Jinping administration would grant the bailout in order to meet development goals. Unfortunately, this would be counter to the optimal strategy of letting the SNGs default and will delay the creation of a functioning municipal bond market.