China Faces Risk of Contagion as Developer Defaults Threaten Local Finances

Defaults by major developers like Country Garden could trigger broader contagion and crashes in China's property sector. This would batter already struggling local governments.

Local governments face mounting debt repayment pressures after years of infrastructure spending. Their finances are closely tied to land sales revenue, which is plummeting.

Analysts say Beijing must bail out highly-indebted local governments to prevent systemic crises. Local debt is ultimately central government debt.

The IMF warns China must pivot from its real estate-driven growth model by restructuring developers and addressing strains in public finances.

Allowing major developers to collapse would exacerbate local government debt burdens. This could trigger bond sell-offs and broader systemic crises.