For years, the risk of local governments breaching their financing platform contracts loomed over the heads of investors, economists and academics. Then, practically overnight, the possibility became a near-reality earlier this year.

Beginning in 2008, China's local government financing platform (LGFP) loans exploded from 1.5 billion yuan to around their current figure of 10 trillion yuan. The infrastructure financing splurge set out to stave off the worst effects of the global financial crisis, but one huge question mark remained: how many of the projects would turn into non-performing loan assets?

Since then, a series of regulatory measures seeking to clarify banks' exposure have emerged, but banks have been unwilling to play along. Even in March, banks' annual reports were still broadcasting that the non-performing rate for platform lending was below 1 percent. With the banking industry well-capitalized and making adequate provisions, they said, the risks were not worth worrying about. Then, one month later, they were hit with notices of LGFP contract breaches.