Local-debt triggers market worries

China's soaring local government debt has become the market's latest concern. Figures from China International Capital Corporation show local government borrowing soared to 5.6 trillion yuan in 2009.

China's local governments usually finance construction projects by setting up urban development investment vehicles, which take out bank loans backed by assets, typically land transfer revenue, or supported by government guarantees.

The massive amount of borrowing by local government has boosted China's total domestic and foreign government debt from 26 percent to 43 percent of national GDP, triggering worries that if a fraction of the borrowing turns sour, banks will be saddled with bad loans.

In addition the reliance of local government on land sales income will drive the property market to inflate to a dangerous level. One optimistic line of thought is that the debt could even spur financial reform, for example by leading to the development of a municipal bond market to give local authorities an alternative source of finance.