China's latest efforts to crack down on high and increasingly risky forms of debt in its financial system are shocking local markets.
Bond yields are rising, stocks are falling and more loans are defaulting, keeping investors on edge.
"Most equity investors we talked to recently cared much more about the financial regulation than the real economy," Macquarie's head of Greater China economics, Larry Hu said in a note released late Sunday ET. "We remain cautious for now regarding the financial market, as regulations are weighing on risk appetite and pushing up interest rates."
In the last several months, the People's Bank of China has raised short-term interest rates, and authorities are reportedly including murky off-balance-sheet wealth management products in their assessments of banks' finances. Tighter regulation on Chinese stock markets has also dampened stocks — the Shanghai composite is roughly flat for the year.