Onshore bond and loan defaults in China have increased substantially in recent years, a situation which has led regulators to strengthen their control of creditors. Many of these are banks seeking direct repayments from their defaulting clients.

But increased regulatory oversight in onshore default scenarios is preventing creditors, such as domestic banks, from enforcing their rights or foreclosing loans.   

"Although understated, government authorities sometimes actively intervene in respect to onshore defaults," said Rose Zhu, partner at Baker McKenzie. She added that the government has shown signs of strengthening its control, since the second half of 2016, when defaults became more frequent and with more severe economic impact.

According to Dealogic, since December 2014, 585 loan deals totalling $325 billion have been signed between domestic PRC corporates – both public and private – and onshore banks. Out of this total, 554 are classified as leveraged loans while the...