Suzhou, an ancient city in Jiangsu province 100 kilometres west of Shanghai, lives in legend as one of China's most beautiful, famous for its elegant gardens and charming canals. More recently, it became an industrial powerhouse, sitting at the heart of the Yangtze River Delta region that, along with the Pearl River Delta in Guangdong, drove the mainland's economic boom. Now it is ground zero for a painful corporate deleveraging that has tacit government approval. A third of all loan delinquencies come from the region, and credit is getting harder to come by. "The more banks do this, the more they promote a vicious cycle, and companies are even less able or willing to repay their loans," said Zhou Dewen, vice-chairman of the China Association of Small and Medium Enterprises. The Yangtze River Delta covers the financial capital of Shanghai and the eastern provinces of Zhejiang and Jiangsu. In 2012, it accounted for half the country's exports and attracted 57 per cent of its foreign direct investment. The outsized role of small, private firms, their savvy entrepreneurs and the vibrant underground financing networks that supported them have been a source of strength for the delta. But now it may be a vulnerability as the government shows it is prepared to let companies fail - at least private ones. Among the six largest domestic banks that classify their non-performing loans geographically, this region accounts for a third of their bad debts. "The delta's economy has been pretty seriously battered," said an executive at a mid-sized bank in Shanghai. Economists say a series of isolated defaults would be mostly positive in the long run for China, by improving risk pricing and the efficient allocation of capital. But there is a risk that defaults could trigger a chain reaction that has the potential to destabilise the financial system. "Prices for raw materials are going up, but for finished goods they're going down. The room for profit is smaller and smaller," said Zhu Dongyang, a sales manager at Wujiang City Pinxin Textile Technology. "Some specific industries bring risk," said Xu Chengming, professor at Nanjing University of Finance and Economics. Xu said solar panels and steel were the biggest sources of non-performing loans in Jiangsu. The channelling of funds into real estate has also increased risks.