It has been clear for some time that China’s municipalities ran up big debts during the country’s heroic post-crisis stimulus in 2009. But only now are the full consequences of this binge emerging.

It is not pretty. According to the country’s first audit of local government finances, municipalities have run up debts of Rmb10,700bn ($1,656bn), equivalent to about 30 per cent of the country’s gross domestic product. The quality of many of these loans is thought to be poor. Collectively they threaten an upsurge of non-performing loans in the banking system.

The main reason for the towering total is that municipalities were let off the financial leash following the crisis. Beijing tacitly allowed them to circumvent a rule restricting their ability to borrow from banks by setting up so-called local government financing vehicles (LGFVs). This licence led to the creation of a hidden overhang of loans. Many of these were invested unwisely in poorly monitored projects, roughly a quarter of which generate no revenue, according to a Chinese official.