China’s “Government-Backed Companies Are Missing Payments. How Bad Is China’s Debt?

China’s real estate crisis has escalated as state-owned conglomerate Zhuhai Huafa Group missed payments on trust products, signaling that state ownership no longer guarantees financial safety. This default highlights a systemic banking crisis where lenders, distrusting borrowers and fearing hidden bad debt, are aggressively de-risking by redirecting capital into government bonds rather than the private economy. This credit contraction is stifling the AI sector, which relies on bank financing for its supply chain, effectively turning the AI bubble into a bust. Despite official statistics suggesting stability, banks are acting defensively, evidenced by record-low sovereign yields and a sharp decline in new lending. The reliance on state-directed credit is failing, as the burden of supporting struggling property developers and state-owned firms exhausts the banking system's capacity to fund future growth, leaving the broader economy increasingly vulnerable.