Now that's a stress test. The Chinese banking regulator reckons the nation's lenders may struggle to recoup about a quarter of the Rmb7,700bn ($1,100bn) they've lent to investment vehicles owned by local governments (LGIVs). If Rmb1,770bn of loans to LGIVs – vital conduits of China's huge economic stimulus – do indeed go sour, that'd be almost four times the system-wide stock of non-performing loans at the end of June.

Remedial measures can only go so far. Last December, the China Banking Regulatory Commission made it more difficult for banks to bundle their LGIV loans into securitisations, discouraging further issuance. In March, the ministry of finance moved to nullify the guarantees local governments provided for loans taken by their LGIVs recognising that in some cases, the guarantees were the only creditworthy assets the vehicles had.

It is much too late to avoid pain entirely, though. LGIV assets are simply not earning enough income to service debt loads. Government sponsors will surely buckle, particularly in non-coastal cities without publicly-traded subsidiaries that can raise capital from the markets. More importantly, the skewed incentives remain. These vehicles – about 4,000 of them around the country – sprang up to circumvent regulations that prevent local governments from borrowing directly. Few vainglorious governors will now want to cut off credit to a half-finished project. And lenders will feel little urgency to start pulling in lines to LGIVs; second-quarter results next month should show strong fee income growth and mostly benign credit quality. This is a general complacency, in short, with uncomfortable echoes of China's last banking crisis just over a decade ago.