China's leadership gathering later this month could be the moment policymakers devise to defuse the US$13 trillion time bomb imperiling Asia's biggest economy.

Though China's property crisis gets the headlines, debt troubles plaguing municipalities across the nation also require urgent action.

At issue is the explosion of local government financing vehicles (LGFVs) in recent years. Such debt, the vast majority of it the off-balance-sheet kind, now almost rivals China's annual gross domestic product (GDP).

Between the default drama surrounding giant property developers and the glut of LGFVs, it's easy to see why global investors worry about China's economic foundations – particularly at a moment of extreme global uncertainty.

With US bond yields staying elevated, Japan skirting recession and Europe walking in place, the second half of 2024 isn't exactly fertile ground for China to manufacture an export surge.

The good news, however, is Xi Jinping's Communist Party seems ready to tackle the ticking LGFV time bomb. Local press reports indicate that a long-delayed economic strategy session to be held July 15-18 will aim to craft a solution to the massive debt pile.

At the upcoming Third Plenum, Xi's inner circle is expected to allow local governments to keep more of the fiscal revenues they generate that currently go to Beijing. The required reforms to China's tax system could be a big step toward removing one of the most immediate threats to financial stability.

It could also be a vital step toward investing more in high-value manufacturing sectors while stimulating now languid domestic consumption. At issue is a lack of social safety nets that causes mainlanders to save more than they spend.

Increased revenues would give local governments greater scope to invest in innovation and productivity-enhancing industries and make municipalities less reliant on property and land sales to stay afloat. They also would diminish the allure of debt issuances.

It's hard to exaggerate the game-changer such a pivot could be. Fixing China's financial cracks is only one part of the process. The other is building economic muscle that puts China on a path toward growing better, not just faster.