For years now, investors have buzzed about a “Lehman moment” in China. So far, Asia’s biggest economy has avoided a major dislocation or default that would have credit markets seizing up and Communist Party bigwigs panicking.

Until now. Last month’s seizure of Baoshang Bank fitted a pattern which punters have long been accustomed to: Beijing’s penchant for stepping in before any institution becomes a risk to the broader system. Markets marveled at China’s determination to avoid market chaos.

Yet the bond market is whipping up its own brand of turbulence, suggesting cracks below the surface.

The global economy has a trade war and perhaps a currency battle in the works, too. To the list, let’s add the monetary brawl that’s sure to dominate the rest of 2019.

In recent days, the heads of the Federal Reserve, the European Central Bank and Bank of Japan telegraphed interest rate cuts in short order. They’ll soon join monetary officials in India, the Philippines and Malaysia in an intensifying race to the bottom. Indonesia, too, following six tightening moves in 2018. And, of course, China is adding liquidity as growth slows.

That has bond yields around the globe grinding lower. Except in China, which is odd, because the People’s Bank of China has been very accommodative. In fact, Chinese sovereign bonds are producing the worst returns among major markets – down 0.1% since April.

Not an epic loss. When put in the context of powerful rallies virtually everywhere else, it’s a curious phenomenon, indeed. In a less chaotic world, China’s bonds would be surging. Slowing growth, tame inflation and the specter of stock volatility amid a global trade war should have walls zooming China’s way. The same goes for the odds of PBOC rate cuts.

In making the bullish case for Chinese government bonds, economist Chen Li of Soochow Securities says “there’s a long-standing concern about growth.”

Baoshang tip of the iceberg?

That’s no match, though, for how Donald Trump’s trade war is destabilizing China and imperiling its sovereign credit rating. Nor can it overcome concerns about the mountains of debt that local governments are issuing to support national growth. Add in downward pressure on the yuan and you have a near-perfect storm of worry. That explains why Chinese 10-year yields are 3.25%, compared with 2.06% in the US, 1.28% in Australia and -0.28% in Germany.

In a more developed economy, capital shifting out of Chinese debt would go into Shanghai or Shenzhen stocks. Instead, the outflows are benefiting Southeast Asia and the US.

Oddly, the seizure of Baoshang Bank might’ve done the opposite of what President Xi Jinping’s men intended. Sometimes, when regulators and central banks step in, markets rejoice. Here, think the US, circa 1998, when Long-Term Capital Management received a bailout. A decade later, though, when the New York Fed kept Bear Stearns from collapse, markets quaked. What else, punters asked, does the Fed know that we don’t?

The worry is that Baoshang Bank is just the tip of the proverbial iceberg. Though it’s in Inner Mongolia, markets have been buzzing about troubles at lenders closer to key finance cities Shanghai and Shenzhen.

That has investors avoiding accepting riskier notes as security, tossing sand in the gears of any number of financial institutions’ funding needs. Borrowing costs for smaller banks and brokerages are rising.

Ominous echoes

“In ominous echoes of what happened before, and certainly after the Lehman failure,” say analysts at Zero Hedge, “it has gotten far harder for corporate bonds to be accepted as collateral for repo financing as lenders increasingly demand top quality bonds such as Chinese sovereign bills and policy bank notes as pledges.”

That’s the thing about credit-market cracks. They tend to emerge with little warning and spread quicker than even the bears imagined. September 2008, when Lehman Brothers imploded, is a case in point.

Risks are even greater in an opaque, developing nation like China. The black-box nature of China Inc. warps yield levels, credit spreads and the sober allotment of credit ratings. Along with censoring the media and Internet, Beijing discredits or blacklists overseas researchers highlighting risks.

Earlier this month, China began allowing local governments to increase borrowing even further for infrastructure. It also will allow municipalities to use proceeds from bond sales as equity in certain projects, including highways and railways. This alone could raise already precarious risk profiles around the nation.

The upshot: when China’s debt markets do crater, it will come out of nowhere for even the savviest of investors.

The timing of all this is ill-timed, just as China is welcoming waves of foreign capital into its bond arena. A recent International Monetary Fund study points out that in the past five years alone, overseas ownership of China government bonds quadrupled to roughly 8%. “This trend of rising foreign ownership is likely to accelerate further,” write IMF economists Sally Chen, Dimitris Drakopoulos, and Rohit Goel.

This opening comes just as US President Trump’s trade war is throwing China off balance. If China’s investment instruments were more trusted, and ready for prime time, yields might be falling with the rest of the globe. They’re not. Worse, their performance suggests turmoil is building quietly but steadily, at a moment of maximum risk for China and beyond.