Economists forecast that more bond defaults may occur in the coming months, which reflects the government’s efforts and confidence for deleveraging.

Global credit ratings agency Fitch Ratings said in a report that corporate bond defaults are expected to continue in China’s onshore market during the rest of this year and stretch the tolerance levels of policymakers.

According to the agency’s estimates, about 4 trillion yuan ($628 billion) of bonds, which were issued in 2015 and 2016 when credit conditions were loose and the bond market entry barriers were low, will become due in 2018 and 2019 respectively.

Signals are indicating tightened credit conditions and continued deleveraging, in line with the government’s “neutral and prudential” monetary policy, it said.

On May 17, the Ministry of Finance and the National Development and Reform Commission, the nation’s top economic regulator, jointly warned Chinese corporates to guard against debt risks, especially those who have borrowed medium to longterm foreign debt.

“Corporates are forbidden to take guarantees from local governments,” said a notice published on the NDRC website, an indication that companies should repay borrowed funds and take risks on their own.

The government’s warning is aiming in particular to separate corporate debt from local government debt in order to reduce the local governments’ contingent liabilities, according to Daisy Lu, an analyst with Moody’s Investor’s Service, another global credit ratings agency.

The warnings came after 10 domestic bond issuers reported defaults totaling 14.6 billion yuan by the first week this month, as against 18 defaults involving 39.3 billion yuan for the whole of 2017.

Wang Ying, senior director of the corporate department at the Shanghai branch of Fitch Ratings (Beijing) Ltd, said: “The increased incidence of corporate defaults reflects the government’s efforts to contain leverage and reduce complexity in the financial system, particularly through a clampdown on shadow-financing activities”. Lower-rated corporate bond issuers, which are usually privately owned companies with weaker ability to acquire bank lending, will face greater challenges within two years－a heavily concentrated period of bond maturities.

Ming Ming, an analyst with CITIC Securities, said that the corporate bond defaults are “surely the price that one needs to pay when banks are shrinking their balance sheets and shadow-banking is retreating due to tighter accounting standards”.

The high level of leverage in China’s corporate sector was fueled by fast-expanding local government financing vehicles, especially for infrastructure construction and property investment projects during the credit boom three years ago, said Ming.

A possible wave of defaults could occur in the coming months if bond issuers are unable to refinance the instruments due to limited alternative financing channels, especially when the regulators are cracking down on shadow-banking lending and constraining credit growth, said experts.

Default risks are also increasing as investor preference is slowly shifting toward higher-rated credit and State-owned enterprises, they said.

A report from China’s central bank indicated that by the end of 2017, the debt-to-GDP ratio of the country’s corporate sector was 159 percent, down by 0.7 percentage points from a year earlier, the first annual drop in six years. The ratio used to rise at an average of 8.3 percentage points per year from 2012 to 2016.