A surprise announcement, China says local governments (cities, provinces and autonomous regions) have racked up $1.65 trillion in debt, threatening a new credit crisis.

The revelation came after the Chinese government conducted audits of local governments.  It seems the local governments are playing the same financing games that got the United States (and Europe) into its own credit crisis, which led to one of its worst recessions.

The local governments were using loan after loan on infrastructure projects and real estate development.  The audit by the Chinese government came as national leaders expressed concern over evidence of the skyrocketing number of potentially bad loans being held by Chinese banks (sound familiar?).

Is this the real reason China is dumping U.S. bonds, to raise cash to pay its debts?