Interest rates investors demand for emerging market debt have risen in recent months, with the spread between the yield on the JP Morgan Emerging Market Bond index and 10-year U.S. Treasury note Profits are increasing even though financial conditions are tightening in some significant areas of the economy; lending rates have inched higher, regulators have clamped down against risky lending and have moved to take the heat out of the property sector. That’s the narrative China is anxious to avoid.”Harvard University economist Kenneth Rogoff said, however, that to view the coming emerging-market debt crisis through the lens of U.S.-China power politics is to underestimate the scope of the problem. Even if this signals Chinese policymakers are more tolerant of companies being pushed into bankruptcy, analysts say it also suggests they are moving slowly so as not to destabilize the economy.

“The inability of some of these countries to repay their Chinese loans could be seen as legitimizing that message. “No one wants the clean-up to happen in a short time span, because it would be very costly not only for the banking sector but for the whole economy in terms of defaults, write-offs of banking loans and redundancies.” Corporate deposits have also risen sharply, while a strong correlation between finance pumped into the economy and the performance of the Shanghai stock market has broken down for the first time in at least two decades, suggesting the performance of those companies, on aggregate, may not be as credit dependent as in the past.

There was also 21.3 trillion yuan in on-budget local government debt -- mostly bonds -- at the end of last year, China's Finance Ministry said. “A majority of low-income economies were moving to a high risk of debt distress toward the end of last year, so it just stands to reason that any strain — let alone the kind of economic shock that we expect from this crisis — would lead to a reckoning of some sort,” Scott Morris, senior fellow at the Center for Global Development told MarketWatch. A Fitch analysis of files from the Supreme People’s Court shows there were 4,700 bankruptcy cases between January and July this year, compared with 5,665 for all of 2016 and 3,684 in 2015. Total social financing (TSF), a broad measure of credit and liquidity, fell to 1.22 trillion yuan in July from 1.78 trillion in June. We see all these trillion dollar budgets, but I’ve seen nothing about foreign aid,” Rogoff added. The government has made reducing China’s debt burden a priority this year after credit soared following the global financial crisis. “Deleveraging is a process that is very long,” said Iris Pang, ING’s Greater China economist. Results so far from the second-quarter earnings season suggest continued momentum on a pick-up in global trade and economic activity: Gansu Jiu Steel (For the 104 companies for which 2017 estimates are available, analysts predict a 38.25 percent overall increase in net profits, compared with 10.6 percent growth in 2016. A large chunk of the corporate debt, which the BIS estimates at almost 1.7 times the economy, has been taken by non-listed entities, especially in the state sector, which employs over 60 million workers. China’s banking debt crisis is a ticking time bomb that must be defused with urgent financial-sector reforms. China’s One Belt One Road Project has been a major driver of emerging market debt, particularly in Africa, according to Andrew Davenport, chief operating officer of international affairs consulting firm RWR Advisory Group.Davenport said that the ongoing coronavirus epidemic could be a moment of truth for BRI. Still, TSF grew 13.2 percent from a year earlier, suggesting authorities do not want to hit the brakes too hard.

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