For the sake of argument, let's assume that the headline is true -- local governments have taken on more debt than they can service in a slowing economy.
What's the endgame? Here are some possibilities, would love to see some economic modeling to quantify some scenarios.
1) Central government gradually inflates the currency to monetize the debt with a few defaults along the way. Damage is funded by Chinese creditors (defaults) and Chinese citizens (inflation), and it takes 20 years to fully play out.
2) Central government bails out bad loans by selling a portion of their $3T in foreign reserves, including $1T of US government debt. Chinese creditors, investors and citizens are made whole. Foreign bond prices fall and interest rates rise, causing recession and financial crisis in the US.
3) Central government bails out a few well connected players, but mostly allows market forces to run their course. Shadow banks and local government financing vehicles go bankrupt, causing a cascade of bankruptcies in the real economy, and economic growth is 200 basis points under potential until 2022.
1) Central government gradually inflates the currency to monetize the debt with a few defaults along the way. Damage is funded by Chinese creditors (defaults) and Chinese citizens (inflation), and it takes 20 years to fully play out.
2) Central government bails out bad loans by selling a portion of their $3T in foreign reserves, including $1T of US government debt. Chinese creditors, investors and citizens are made whole. Foreign bond prices fall and interest rates rise, causing recession and financial crisis in the US.
3) Central government bails out a few well connected players, but mostly allows market forces to run their course. Shadow banks and local government financing vehicles go bankrupt, causing a cascade of bankruptcies in the real economy, and economic growth is 200 basis points under potential until 2022.