People seen outside the SinoSteel Corp. headquarters in Beijing on Wednesday. AP Photo/Mark Schiefelbein BEIJING — Chinese leaders' ambition to use market forces to make the state-dominated financial system more efficient is colliding with their version of "too big to fail."

The latest reform target is China's sleepy bond market. Until last year, Beijing protected buyers of corporate bonds by bailing out any company that ran short of cash to repay them. Since then, it has allowed a growing number of defaults, hoping investors will be encouraged to look more closely at companies and force risky borrowers to pay more.

Now that stance is being tested by a credit crunch involving a steelmaker that is owned by the Chinese Cabinet and part of an industry the Communist Party says is a pillar of the economy.

SinoSteel Corp. faced the possibility of being required to pay bondholders up to 2 billion yuan ($315 million) in October but says that has been pushed back to December 16. That followed reports the company warned it might lack the cash to pay, prompting China's planning agency to organize talks with creditors in a sign of SinoSteel's elite status.

A SinoSteel spokeswoman, Zhang Zhuo, said the two sides were in negotiations on repayment.

The conflict highlights the tension between the Communist Party's desire for the prosperity that comes from competition and its insistence on protecting state companies that underpin its political and economic plans.

"If a company is too big or too important, even if it loses money, it is difficult for the government to handle a default," said Chen Kang, chief bond analyst at the SWS Research Ltd.

Plans to develop the bond market have been under discussion for a decade. Advocates say shifting away from reliance on state-owned banks will reduce political interference in lending and force borrowers to be more disciplined.

The ruling party has yet to disclose all the details, but economic planners suggest some borrowers are too important to fail.

An investor in front of an electronic board showing stock information at a brokerage house in Huaibei, Anhui province, in 2013. REUTERS/Stringer

A deputy director of the Cabinet planning agency, the National Development and Reform Commission, said in a June 29 speech its local branches should prevent defaults by state companies, according to business news outlets.

"We cannot allow a credit market default incident to occur, thereby affecting the entire credit environment and financing for state-owned enterprises and national financial stability," said the official, Lian Weiliang, according to Caijing, a business magazine. Lian's agency released no transcript, but other outlets attributed similar comments to him.

In September, a state-owned manufacturer of smelting equipment, China National Erzhong Group, said it might miss an interest payment on a 1 billion yuan ($160 million) bond. Its corporate parent averted losses to investors by purchasing their bonds.

Chinese companies are struggling with economic growth that fell to a six-year low of 6.8% in the latest quarter. Companies that expected at least 7.5% growth this year are scrambling to repay debts out of weakening cash flow.

The number of defaults still is low in a 40 trillion yuan ($6.3 trillion) Chinese bond market with some 3,000 issuers, but that is expected to rise as growth of corporate revenue slows.

Especially vulnerable industries include steel, cement, and solar panels, where rapid expansion during the past decade's building boom left high debt and a glut of unneeded production capacity, according to financial analysts.

"We certainly will see an increasing number of corporate defaults," said Sun Binbin, chief bond analyst for China Merchants Securities.

In the biggest failure yet, a cement maker, China Shanshui Cement Group, defaulted last week on a 2 billion yuan ($315 million) note.

A factory of Shanshui Cement is seen in production in Liaocheng, Shandong province, in 2004. REUTERS/China Daily

Investors also have lost money in smaller defaults by a real-estate developer, a producer of solar panels, and a manufacturer of power equipment.

Regulators want to enforce discipline by letting weak borrowers fail without allowing a wave of defaults that might hurt the ability of healthy companies to raise money, according to Christopher Lee, chief ratings officer for Standard & Poor's Hong Kong office.

"Market discipline is the byword for the government but it is a balancing act," Lee said in an email.

SinoSteel's troubles are a side effect of Beijing's effort to rebalance the economy away from reliance on trade and investment by nurturing growth based on consumer spending and service industries. Controls imposed to cool a debt-fueled construction boom have crushed demand for steel, cement and other building materials.

The tussle with investors stems from a 2010 bond issue that matures in 2017. Investors had the right to ask for early repayment in October, but news reports said SinoSteel warned it might not have enough cash.

The company spokeswoman, Zhang, declined to give details of the negotiations, SinoSteel's financial status or the government's role.

"With the agreement of the investors, what we have done doesn't violate China's Securities Law and does not constitute default," Zhang said. "We hope that through negotiation a final agreement can be reached."