Although China’s corporate debt load continues to worry government officials and tease western observers, borrowers have avoided problems because borrowing costs have plunged for much of the past three years. That’s why the recent spike in corporate bond yields is worrying – should yields remain high, high debt-servicing costs could shock the overleveraged corporate sector. It seems we have all the necessary ingredients for a balance sheet recession.

But, we’re not there yet. In fact, high yields still haven’t filtered down to borrowers. Using industrial enterprise economic indicators data, I estimated the actual interest rate paid by Chinese borrowers. Over the past six months – as corporate bond yields, SHIBOR, and WMP yields all rose dramatically – the actual interest paid by China’s industrial enterprises fell to an all-time low.

Chinese borrowers have maintained low interest payments for two reasons. First, they’ve cut back on borrowing since the rebound in yields. Second, when they do borrow, they do so at below the benchmark lending rate courtesy of a solicitous banking system. So, most existing loans were extended at previous, lower rates, and new loans are significantly underpriced.

Despite large and growing debts, China’s borrowers have yet to suffer from a rebound in borrowing costs. Should banks continue to extend credit at below market rates, China’s balance sheet recession will just have to wait.