China needs to issue municipal bonds to correct an asset/liability mismatch that is threatening to create more liquidity problems in Chinese debt markets, according to several sources in the country. In a report, China Inside Out – Local debt: Three options, Qu Hongbin, chief economist for greater China at HSBC, says that the "mismatch between the maturity structure of bank borrowings and the payback period of long-term infrastructure projects" poses a liquidity risk that needs to be addressed via a restructuring.
| "Remember that ‘repaying’ debt means servicing interest payments in a condition of repressed interest rates" |
Much of the debate on the level of non-performing loans (NPLs) on China’s local government balance sheets has focused on the total size of the problem. These NPLs, generated when China’s post-crisis stimulus plan flooded local authorities with cash to spend on infrastructure and development projects, are seen by many China watchers as a cause for serious concern even as the government reassures the outside world that the issue is under control. Xinhua, a Chinese newspaper, reports that the finance ministry has described the default risk of local government debt as "controllable overall", and said that as a whole local governments are in a position to repay these debts.