. So-called local government financing vehicles, which were established to fund infrastructure projects, have already defaulted on many trust loans which were part of that shadow system.
China watchers say allowing too many defaults could jeopardise the financial stability and near-term recovery. Analysts at Goldman Sachs recently pointed out that widespread failures in the sector could spill over into the banking system, causing banks to cut back on lending more broadly, or increase interest rates, the latter of which is already starting to happen.
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