For China, Debt Disaster Lurks in the Shadows

Analysts with the proper degree of skepticism about China’s boasts of soaring economic power note that official reports from the Communist regime cannot be trusted. Another, less widely understood problem is that China’s rulers might not know how unstable their economy really is because a sizable portion of Chinese debt lurks off the books in the “shadow banking” industry.

Reuters took a deep dive into shadow banking on Thursday, beginning with the story of a family hoodwinked out of its combined fortune by a high-yield “safe investment” that turned out to be a dodgy investment fund. In essence, China’s central government decided to limit the amount of debt fueling its economy, but people wanted to borrow more, so a huge amount of “shadow loans” were made with dubious business plans.

Many of these plans are far too complex to be fully understood by the people buying into them. Their complexity is one of the reasons they can evade regulators, but it also means these shadow loans and investment plans have a lot of moving parts, and if any element of the financial plan fails, the whole thing blows up..

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