Will China’s debt woes develop into a full-blown banking crisis?

A rising tide of corporate debt defaults is spooking investors in China’s financial markets and sparking some concern that another banking crisis may be just around the corner.

More than 20 mainland firms have failed to meet bond or loan repayments so far this year, many of them the victims of monetary tightening as Beijing tries to ward off financial risks by reducing borrowing levels.

With bonds worth about 20 trillion yuan (US$3.12 trillion) due to expire within the next year, and tighter liquidity making it difficult for indebted companies to access new financing, there are fears the number of defaults could start to spiral.

“Investors are getting skittish about the defaults, fearing that more will come in the next few months,” said Wang Feng, chairman of Ye Lang Capital, a financial services company based in Shanghai. “The financial regulators are standing firm in deleveraging the economy, and it is certain that dozens of debt-ridden corporate borrowers grappling with the cash squeeze will have difficulties in repaying loans.”

Nonetheless, some analysts and business executives contend that any panic at this stage is premature.

“It is just a matter of time before fears about a crisis will ease,” said Wan Qin, a Shanghai-based entrepreneur in the laundry business. “It is a difficult time now, but it’s a far cry from a crisis.”