Profits at roughly a quarter of Chinese companies in a Reuters analysis were too low in the first half of this year to cover their debt servicing obligations, as earnings languish and loan burdens increase.
Corporate China sits on $18 trillion in debt, equivalent to about 169 percent of China's GDP, but few firms reported feeling the heat.
Instead, lenders are heeding Beijing's call to support the real economy and so are rolling over company debt or granting repayment waivers, sometimes for years, specialist lawyers and investors said.
This is evidence that China may be in for a long period of Japan-like stagnation rather than a single event triggering a crisis - what some economists call a "Lehman moment" after the collapse of Lehman Brothers in 2008, which touched off the global financial crisis.
"They are kicking the can down the road for stability in the short term," said Roland Mieth, Singapore-based emerging markets portfolio manager for U.S. fund manager PIMCO. "China can maintain status quo for many years to come, like Japan did with their leverage, without triggering a financial crisis."
International institutions have warned China to stop financing weak firms, especially inefficient state-owned enterprises (SOEs), which tend to crowd out the private sector. More defaults are needed, they say, to improve credit allocation and stop wasteful spending in the economy.
But while China has recognized the need to wean its corporate sector off of cheap loans, Premier Li Keqiang has also promised credit would keep growing, and state-run banks have been urged to support small and medium enterprises (SMEs).
And banks are listening, say lawyers and investors, with companies given three or four years of grace, when they do not pay interest, or helped to restructure bonds at full value, essentially, rolling them over.
"Premier Li has asked banks to rollover loans, especially for SMEs. That's a clear reason why bond defaults are coming down," said brokerage CLSA's head of China strategy, Francis Cheung.
"(Banks) have shifted focus from bad debt recognition to economy-supporting measures. Banks are giving more grace period and reporting more stable NPLs (non-performing loans), even after guiding earlier that these ratios will rise."
Goldman Sachs estimated last week there was only one default in the domestic Chinese bond market in the past three months, compared with at least 10 in the first half of the year.
Of course, onshore defaults could and will still rise - rating agency S&P Global says the credit quality of about 240 Chinese companies it rates is deteriorating more quickly than at any time since 2009.
The muted default situation "is an aberration given the sharp deterioration in credit risks," it said in a research note.
According to Reuters data analysis, profit in the first half of 2016 fell a median 0.8 percent for 527 mainland listed firms and grew just 0.3 percent for a group of 93 Hong Kong-listed Chinese companies.
Overall debt levels for both are at record highs.
For the 93 of Hong Kong's largest Chinese companies with listings stretching back to 2011, their ability to repay debt with current profits has only been lower once in the last five years.
Almost half have operating profit less than three times their interest payments - heading towards an unhealthy balance. One quarter do not make enough to cover their interest costs, the analysis shows.
HOUSE OF DEBT
The impact of growing debt has been, for many, lower profitability and less long-term investment. Increasingly, debt is being used to pay back other debt and not to fund growth.
Debt is also growing - the China Beige Book reported the highest number of firms in three years took loans in the third quarter.
Already, profitability, as measured by return on equity (ROE), is the lowest in at least five years for the 93 Hong Kong-listed companies surveyed by Reuters, standing at 7.32 percent.
For 527 mainland listed companies, the median ROE stands at 5.07 percent, also the lowest in at least five years. Analysts generally consider a healthy ROE to be 15-20 percent.
But while many companies reported they were repaying debt, some already deeply indebted groups said they had little trouble accessing more loans, especially for acquisitions overseas.
"We don't have this problem," said an executive in the company secretary's office at Shanghai-listed Jinggong Steel <600496.SH>. "We can just apply for super-short financing from Chinese banks, we are not anxious."
At one large, state-owned Hong Kong-listed developer, whose profits no longer cover its interest cost, an official said the outlook was still positive for loans, though it was becoming tougher to raise capital through bonds.
"There's a lot of liquidity in the market and the interest rate is low - even for perpetual securities the interest rate is low if you repay within five years. Borrowing from banks has not been a problem," the official said. "Being an SOE also helps."
(Additional reporting by Clara Ferreira Marques in SINGAPORE, Clare Jim in HONG KONG, Tripti Kalro in BANGALORE and Shanghai Newsroom: Editing by Neil Fullick)