Nowhere are China's rusted-out industries worse than in Liaoning, a province that's slumped into outright recession and where officials have admitted to years of inflating fiscal revenue data.
Liaoning is also a showcase for how long a road China faces to create a world-class bond market. For all its problems, the district pays little more than its peers to borrow. On the corporate side, authorities' reluctance to let more insolvent enterprises go under means a limited role for the market, with financiers willing to restructure their debts on the sidelines.
Instead of clearing the way for healthy firms to compete free from zombie rivals and giving investors a way to make long-term bets on recovery, policymakers have demonstrated a preference to wait for help from Beijing, according to bankers who've examined potential Liaoning deals.
"Liaoning's government and the people there dare not or would not like to solve its problems via the market," said Shen Meng, Beijing-based president of Chanson & Company, a private investment bank. "They're still waiting for the central government's supportive policies. That's the biggest stumbling block."
An official at the Liaoning provincial government who declined to be identified said when reached by phone that in handling non-performing assets, its departments apply market-based rules, and declined further comment.
Authorities in the region about 700 kilometers' drive northeast of Beijing are trying to cope with twin objectives laid out by Premier Li Keqiang on a visit to Liaoning in September 2015 - on the one hand, to stabilize growth and support jobs, and on the other to increase economic efficiency, state media reported at the time.
At the end of that year, there were some 830 so-called zombie companies in the province - loss-making enterprises that live on government subsidies and bank loans, according to data cited in an International Monetary Fund paper.
That count was taken before the province, a strategically located industrial zone once fought over by the empires of Russia and Japan, slid into recession. By its official data, gross domestic product contracted 2.2 per cent in the first nine months of 2016 compared with the previous year, after swathes of coal, steel and iron production were shuttered.
While defaults are still relatively rare in China, half of the corporate bond defaults in China in the last 12 months have been in Liaoning, according to data compiled by Bloomberg. There are 125 enterprises with bankruptcy filings, according to an official website, the fifth worst among all provinces.
The still-profitable assets of troubled state-owned enterprises in Liaoning are priced too high to lure private investors, bankers say. At the same time, private companies' financial records are often too opaque to give confidence in engaging in transactions.
"A lot of the state firms are actually integral to the fiscal survivability of Liaoning province - so they can't say to a Wilbur Ross of China that we will accept 10 cents on the dollar," said Andrew Collier, managing director of Orient Capital Research, referring to the American private equity investor. "If they do that, that means the entire economy is bankrupt."
Collier highlighted in "Shadow Banking and the Rise of Capitalism in China" the determination of Liaoning authorities to protect the operations of Dongbei Special Steel Group, a state-owned enterprise that's defaulted on its bonds at least nine times.
Dongbei remains in operation, with no obvious moves to shutter its operations. The steelmaker entered bankruptcy proceedings last year and has administrators working on a plan for 7.2b yuan (NZ$1.46b) of notes, according to an October 18 filing.
The company illustrates the historical reluctance to let companies go under, or sell off performing assets after a restructuring. China Orient Asset Management Holdings Co., one of four major national asset managers set up in the 1990s to resolve bad debts, took on a near-17 per cent stake in the enterprise in 2001. Though China Orient has sold off other bad debt over the years, it was still sitting on the same Dongbei holding 14 years later, bond documentation showed.
There was no reply to e-mailed questions to the company about its debt reduction preferences.
Other cases in Liaoning also point to broader problems. Dalian Machine Tool Group Corp. is a prime example of a company in an industry that's ripe for winnowing, as identified by Bloomberg Intelligence analyst Nikkie Lu.
There's no public sign of any restructuring plans after a series of defaults on bonds that began in November. There was no reply to questions faxed to the company about its debt-resolution strategy.
"Some assets in Liaoning remain profitable for asset management companies or distressed debt funds," according to Shen, the private investment banker, who said he had unsuccessfully attempted to participate in several corporate financing projects in the province in recent years. "The point is the pricing."
The continued role of the four state asset managers as key players in addressing non-performing loans, or NPLs, may also inhibit some private-sector actors.
"There are definitely tremendous opportunities within the distressed/NPLs space in China, Liaoning in particular," said Kevin Wu, a portfolio manager at Pinpoint Asset Management Ltd. in Hong Kong. But "some market participants (including ourselves) decided to stay cautious when it comes to credit from Liaoning province," he said.
The role of authorities in Beijing is also seen when it comes to Liaoning's provincial debt. While it has one of the higher debt-to-GDP ratios and faces questions about its economic data, the province pays little more than others on its bonds.
Liaoning's most recently issued three-year local government bonds were priced at 2.51 per cent in September -- compared with 2.42 per cent for Henan, 2.48 per cent for Guangxi and 2.42 percent for Jiangxi, provinces in the middle ranking of debt ratios, which all have expanding economies.
By contrast, take a look at U.S. states and there's a wide gap in borrowing costs depending on credit quality. Benchmark three-year notes from Illinois, the lowest-rated state, yielded 3.28 per cent last week. Comparable securities from AAA grade Texas were at just 1.23 per cent. The difference from China: investors don't anticipate federal bailouts if the states run into problems.
The bottom line for Liaoning, and China: "Asset markets will continue to be distorted should the perceived government implicit guarantee be here to stay," said Pinpoint's Wu.