Qinghai Provincial Investment Group, a state-owned investment vehicle in the country’s remote northwest, defaulted on two bonds earlier this week. One was missed interest payment on a RMB 20 million ($3 million) onshore bond which, though undoubtedly a negative sign, was not exceptional given the growing prevalence of defaults since 2014, when Baoding Tianwei Group became the first state-owned enterprise (SOE) to formally default on onshore debt.

The other missed payment by Qinghai Provincial is far more notable: a $10.9 million interest payment due on a Hong Kong bond. The default represents the first time that a state-owned enterprise has defaulted on offshore debt in over 20 years.

The default suggests a paradigm shift in how the authorities are treating debt-saddled SOEs in a tough economic environment. There is often an assumption that the authorities will step in to bail out state-owned enterprises in times of trouble. Qinghai Provincial itself had been bailed out twice within the past year by the Qinghai government, which helped the investment vehicle make payments on maturing bonds.

The moral hazard that results from this approach is glaringly obvious. And herein lies the delicate balance the authorities must seek to maintain: discourage risk-seeking behavior from investors who feel like they’re underwritten by provincial and local authorities, all the while avoiding a market panic or chain reaction of defaults that could destabilize China’s financial system.

The last time this happened was in 1998, when Guangdong International Trust and Investment Corp. (GITIC) defaulted on USD-denominated corporate debt payments. Then, as now, the problem was a plunge in real estate prices, which the firm had borrowed extensively against. Following the collapse of GITIC, hundreds of other investment vehicles, public and private, crumbled in its wake as investors pulled out en masse. We may see something similar happening in the months ahead, particularly if the US-China trade war carries on and the authorities continue their laissez-faire approach.