Defusing debt risk requires confidence

With analysts and observers busily conjuring market predictions for the 2015, many are now wondering whether spiraling levels of local debt will spark a crisis next year. Outstanding local government debts amounted to 17.9 trillion yuan ($2.88 trillion) by the end of 2013, including 6.9 trillion yuan borrowed through local government financing vehicles (LGFV).

How will authorities cope with this huge amount of debt? Few now doubt that central authorities will tighten controls over LGFV debt. Yet a "shock therapy" approach is considered unlikely considering the sheer scale of local borrowing.

The government is expected to promote a market-oriented financing model, such as the public-private partnership (PPP) model pushed by the Ministry of Finance, the National Development and Reform Commission and the central bank. This model will see public and private capital used to jointly finance projects.

The success or failure of the PPP model will hinge on whether private capital holders are confident enough to cooperate with local governments on the development and construction of infrastructure projects.