The debt is substantially owed by local Chinese governments, SOEs and developers to Chinese banks.<p>The central government could:<p>1) Transfer the debt to itself (a bailout) this leaves the central government with a very high (although sustainable) debt load but doesn&#x27;t address any of the underlying problems.<p>2) Inflate the debt away. This doesn&#x27;t address any of the underlying problems but it also impoverishes a lot of people who thought they were doing well. It also increases capital flight pressure.<p>3) &quot;Stress test&quot; the banks, requiring loans in arrears be paid, bad loans be written off, stopping the process of sending good money after bad. This is the only move that address the underlying problems, but it means the banks collapse (because they&#x27;re already insolvent), the SOEs go bust, plus the problem of insolvent local governments would have to be addressed; people lose their old age pensions, massive unemployment. Plus most of the PRC&#x27;s members wealth is in SOEs so this will affect them personally. Also the government will have to recapitalize the banks if it wants a financial sector at all (see option 2).<p>4) Claiming to do 3 while actually doing a combination of 1 and 2. This is probably what they will do and if they succeed, at the end of the day, the can will be a little further down the road.