What if they held a bond auction and no one came?

That’s what China found out after several provincial governments were forced to postpone bond auctions Friday. It seems the local lenders expected to pick up the bonds didn’t like the low interest rates being offered, according to the Financial Times Alphaville.

Of course, that’s not the way it was supposed to go. When China’s finance ministry last month announced its plan for helping provincial governments refinance about one trillion yuan of debt, lower their debt-servicing costs and extend maturities, it described a way for the People’s Bank of China to avoid getting involved.

This was not a bailout by the central bank. It totally expected local banks to pick up the slack.

Folks outside China shouldn’t snicker at the trouble faced by Chinese regulators. Beijing’s debt refinancing plan was hailed by some analysts as a workable way to tighten down on a huge nonperforming loan problem haunting local Chinese banks and localities. If the debt bomb is as bad as some fear, it could blow a hole in the Chinese economy that will rock world markets.

Alphaville quoted UBS’s Wang Tao in a note: ” We think the local debt swap is the right step in restructuring local debt and believe this should be done on a much larger scale” adding that the loans and loan-type assets will become bond securities that will be sold because they will be more liquid.

The new bonds were offering interest rates of 4.7%, compared with the 5%-6% paid on the bonds issued in 2014.

The local governments have been having trouble servicing the debt because of the decline in property prices and falling tax inflows. Because of this, the central bank increased the amount of local bonds that social security funds could hold.

Tao wrote: Given the general abundance of domestic saving and controls on bank lending, there should be sufficient domestic liquidity and demand for local government bonds, and there is no need for the central bank to purchase them.”

“Nice try,” said the social security funds, which decided if the state-owned banks were treating the bonds like damaged goods, then the funds didn’t want them either.

Alphaville concluded: “This bond failure indicates that even state-owned financial institutions, the primary buyers of local government debt issues, may not look favorably on the risk-return profile of this class of bonds.”

That can’t be good. Even the best-laid plans fall short if markets don’t cooperate.

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