China's ballooning local government debt has become a major challenge for their central government. The main risk is a lack of transparency in some hidden local government debt that could undermine China's financial system stability. However, the current level of debt remains manageable since the central government will likely prohibit local authorities from raising funds via opaque financing vehicles.
In the worst case scenario, wherein if the level of debt gets out of control and has far-reaching effects on their economy, it is expected that the central government will likely shoulder such debt itself. They would then consolidate such fiscal obligations to uphold confidence toward local governments' creditors. Nevertheless, such measures could slow many local authorities' large investments and, in turn, inhibit China's economic growth later on.
Given this, the Chinese economy may grow only 7.5-8.0 percent over the next few years, down from an average of 10.3 percent during 2002-2012.
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