among Chinese banks in early July has caused unease among investors and local officials. Known as “Document No. 15”, the regulatory directive says that banks should stop lending to heavily indebted local-government financing vehicles , companies set up by city or provincial governments to finance building projects and public works. The groups, which have not so far been allowed to default, have about 48.7trn yuan in debts, 11.9trn yuan of which is held in fixed-income securities.
More worrying, however, are the size and profile of some struggling companies. Defaulting groups had on average about 1bn yuan in outstanding onshore bonds in 2015, a year after China experienced its first default in recent times. That figure has climbed to nearly 9bn yuan this year, reckons, a rating agency. Evergrande, a troubled property giant, is on the hook for more than $100bn in interest-bearing offshore and onshore debt.
These risks threaten to shatter the calm portrayed by technocrats in Beijing. But regulators may be more willing to countenance defaults than they were in the past. They have seized control in two key areas that make defaults easier. One is a tighter grip over unruly companies owned by municipal and provincial governments. Upon defaulting these groups were often allowed to make inside deals that benefited well-connected creditors but excluded others.
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