A succession of defaults has rattled China’s $15tn bond market and is raising concerns about the country’s financial health following a sharp slowdown in economic growth this year. For foreign investors who have snapped up Chinese paper in 2020, the burning question is whether the liquidity crunch will spread. For more general observers, the risk is that bond market defaults may signal deeper structural weaknesses.

Such concerns are important. But from a policy perspective, the defaults are to be welcomed. They show that Beijing is seeking to impose a measure of financial discipline after a record debt splurge in the first two quarters. Such discipline is sorely needed: total debt to GDP was approaching 335 per cent at the end of June, up from 302 per cent at the end of last year, according to the Institute of International Finance.

Beijing’s main message appears fairly straightforward. It is warning state-owned enterprises and their local government backers that some of the easy credit that was deployed to combat the pandemic is being reined in as China’s economy recovers. It is also making clear that the type of sustained liquidity splurge that Beijing unleashed in the aftermath of the 2008 financial crisis will not be repeated.