The central bank signalled the start of a tough new regime when it bankrupted Guangdong International Trust & Investment Corp (Gitic) in January last year. Foreign banks, the People's Bank of China (PBOC) said, knew the risks when they lent to Gitic and other trusts. In Beijing's brave new market economy, foreign banks were (perish the thought) ultimately responsible for their lending decisions. Foreign banks squealed betrayal. They argued that they had a gentleman's agreement with the government. In return for suspending their better judgment and lending to non-transparent trusts, their loans would be backed by the government. The government apparently forgot that hell hath no fury like a banker scorned. After Gitic's bankruptcy, credit lines to mainland firms dried up overnight. 'The government really overlooked the impact [of Gitic's bankruptcy] on the [lending] market,' said a foreign banker. Last year, foreign lending into Guangdong province fell 51 per cent to US$1 billion - mostly reserved for the operations of foreign multinationals. One sign the government was taken aback by the reaction to Gitic's bankruptcy was that, until last month, no additional trusts were closed. The government did not want to spook foreign lenders any further, choosing instead to engage creditors in prolonged negotiations. However, the 18-month stalemate is over. In just over four weeks, from July 10 to August 7, the central bank closed six trusts and leasing companies. On August 4, the first settlement between foreign creditors and a troubled trust was announced. Foreign creditors of Dalian International Trust and Investment Corp agreed to accept a 40 per cent reduction (or 'haircut') of the company's debts in return for cash settlement of the remainder. A similar offer was put before creditors of Guangzhou International Trust and Investment Corp (Gzitic) last month. Gzitic's creditors were asked to accept a 60 per cent haircut. So with one settlement in the bank and others emerging, who played their hand better in the wake of Gitic's bankruptcy - the government or foreign banks? The answer has to be the government. By tossing Giticinto bankruptcy court, where its dismemberment would be governed by the (still provisional) Bankruptcy Law, the government absolved itself of responsibility for the company's 39 billion yuan (about HK$36.5 billion) debt. The move also set an intimidating precedent, considering the limited recourse available to foreign creditors under this law. 'Foreign creditors do not have much say in Gitic's liquidation process,' said a Guangzhou-based foreign banker. 'All the decision-making power rests with [Gitic's liquidation] committee.' The last thing foreign banks wanted to see was other troubled trusts in court. Ironically, the government feared a wave of trust bankruptcies even more than foreign banks did, given the potential effects on the commercial banking sector. But foreign banks did not call Beijing's bluff, and as each day passed the government's position grew stronger. '[At the time of Gitic's bankruptcy] China was still under the influence of the Asian financial crisis. Now the picture is completely different,' said one foreign banker. 'The government is in a much better position to bargain with creditors.' Time also took its toll on foreign creditors. 'Monitoring a doubtful account is very costly,' said the banker. 'And no matter how many trusts have been or will be closed, China is still potentially a very big market'. Another banker said: 'For big foreign banks you have to forget about [Gitic's bankruptcy] because it already happened and you have to be here for another 50 or 100 years. We're always looking forward.'