She added that because half of all new lending was through offshore vehicles, wealth-management funds and trusts it was easy to off-load bad assets. She added that there were already examples of defaults in trust products. Recently a spike in Shibor borrowing rates caused Bank Everbright to default on an interbank loan.
Fitch estimates that $2 trillion worth of wealth products are actually second balance sheets for financial institutions that allow them to avoid the regulators and circumvent loan curbs.
According to Chu the central bank has $3 trillion in reserves taken from the banks to be used as a buffer in the event that there is a financial crisis. However, she added that even a pot of this size may not be enough to deal with the sheer scale of China’s lending boom.
She went on to say that since the Lehman crash five years ago, China has managed to effectively replicate the US commercial banking system. During this period lending has grown from $9 trillion to a staggering $23 trillion.