“The lack of government support for Bohai Steel’s creditors could lead to greater credit risk pricing for weak companies operating in industries with excess capacity,” Standard & Poor’s credit analyst Christopher Lee said in a report.

The Chinese government has promised various measures to reduce the government’s role in the economy, including restructuring state-owned industries. But the heavy debt load of state-owned companies may make reform difficult. The steel, coal, cement and non-ferrous metals sectors carry combined debt of US$1.5 trillion.

Bond defaults and even bankruptcy are relatively rare in China, especially for state firms, but the government is trying to highlight the risks of rising debt and set up mechanisms to mitigate those risks.

Tianjin government, which owns Bohai Steel, will coordinate with creditors, which could involve deferment of interest payments and extension of debt repayments, to facilitate plant closures and asset restructuring. The city government’s asset management company may also lend a hand by acquiring delinquent loans.

David Qu, China Rate strategist at ANZ bank expects Bohai Steel to pursue a combination of a debt-equity swap and direct cash repayment as it proceeds with restructuring.

However, Qu warned that converting debt into equity is not simple, and that cosmetic changes won’t be enough to restore market confidence.

Qu said he favoured the use of debt capital markets to address the structural problem of China’s debt portfolio over the longer term, as direct financing will enhance the transparency of the lending market and promote transferability of loan assets.

There are signs that investors are trying to scale back exposure to Bohai Steel’s debt. The steelmaker’s 1.5 billion yuan 2017 Dim Sum notes fell 22 yuan last week, reflecting the biggest weekly fall since the notes were sold in 2014.

Qu said he was cautious on the outlook for Chinese corporate-bonds especially in sectors suffering from excess capacity problems, including manufacturing, mining and trading companies.

Lee from Standard & Poor’s cautioned in his report that investors may start to reassess the credit risks of Tianjin’s government-owned entities.

Bohai Steel isn’t the only Chinese company struggling to meet its debt obligations. Guangxi Non-Ferrous Metals Group is undergoing a bankruptcy and restructuring process, according to a report last week by Caixin. The company has debt of 14.5 billion yuan, the report said.

People’s Bank of China governor Zhou Xiaochuan warned last weekend about the sharp rise in corporate debt.

ANZ estimates that Chinese corporate debt amounted to 98.2 trillion yuan by the end of 2015, equivalent to 145.2 per cent of GDP. In the US corporate debt is about 70 per cent of GDP

Beijing is studying plans to allow commercial lenders to swap non-performing loans of companies into equity stakes.