But dangerously high levels of municipal debt are only a manifestation of the underlying problem, not the problem itself. Even if the financial authorities intervene, unless they can change the economy’s underlying dependence on accelerating investment, it won’t matter. They will simply force the debt problem elsewhere. In all previous cases of countries following similar growth models, the dangerous combination of repressed pricing signals, distorted investment incentives, and excessive reliance on accelerating investment to generate growth has always pushed growth past the point where it is sustainable, leading to capital misallocation and waste.
Michael Pettis - China's Reliance on Investment-Driven Growth - Room for Debate - NYTimes.com
Many people focus on the invisible debt of local municipalities, but PEttis argues that is just 1 manifestation of an economy that over-reliant on investment driven growth. Capital misallocation is such a big problem that it's hard to stop until excessive debt forces them to stop.