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AFAIK, the debt is internal: it's Chinese firms that owe Chinese banks who owe Chinese people. The possible problem is if those firms aren't solvent; that could bring lots of Chinese savers to lose their savings.

If you read the article it mentions that local governments borrow from government owned banks. Perhaps that explains some of it.

So is this a case of merely moving money from one pocket to another? Or are local governments actually independent of China's allegedly totalitarian central government?

We do the exact same stuff.

http://money.cnn.com/2016/05/10/news/economy/us-debt-ownersh...

Also as for holders of debt. Japan beats China

http://money.cnn.com/2016/12/16/investing/china-japan-us-deb...

China is not biggest holder of US debt - that's a title held by the US people who the government owes social security payments to.

China is not the largest holder of American debt. This is a myth that contains not even a sliver of reality.