Local borrowing sounds alarm bells

Recent estimates from China International Capital Corporation put local government debt levels at around 22 trillion yuan ($3.51 trillion) by the end of 2014, with 15 to 20 percent of this amount tied up in "highly risky" projects.

The local government bond market is now valued at about 5.6 trillion yuan, most of which will mature in 2016. By that point, local governments could face enormous repayment pressure.

Financial institutions must also confront the looming repayment risk, since a substantial proportion of their assets come in the form of loans to local government financing vehicles.

Data from the country's top banking authority put the nonperforming loan ratio of local commercial lenders at 1.29 percent at the end of 2014, up from 1 percent a year earlier. As is often the case, the true situation may be much worse than official figures suggest.

With central authorities tightening up on borrowing, whether local debt conditions lead to a crisis in 2015 will likely depend on three factors: banks' willingness to keep lending, local capabilities to increase debts and the promotion of the Public-Private Partnership model.