The 8 Trillion Black Swan: Is China's Shadow Banking System About To Collapse?

Tyler Durden's picture

"Wealth management products in China have come under the spotlight after a series of missed payments raised concerns over the shadow banking sector that often directs credit to firms shut out from bank lending or capital markets," Reuters said in February, after reporting that CITIC (China's top brokerage), was looking at ways to repay investors after the issuer of one of the wealth management products the broker sold missed a $1.12 million payment to investors.

That news came a little over a year after the now infamous "Credit Equals Gold #1 Collective Trust Product" incident and a subsequent default scare on a similar product backed by loans to a struggling coal company. 

Although wealth management products and CTPs (which differ from WMPs) are often described as "murky" and "opaque", the basic concept is fairly simple. WMPs are marketed to investors as a way to get more bang for their buck (er.. yuan) than they would with bank deposits. Funds from these investors are then invested at a higher rate. If the assets investors' money is used to fund run into trouble, that's not good news for WMP investors. Simple. 

The main issue here is the sheer size of the market. As FT notes, "in 2010, as regulators tried to rein in the explosion in bank credit resulting from the country’s Rmb4tn economic stimulus plan, banks turned to trusts to help them comply with lending controls." So essentially, trusts helped banks offload credit risk at the behest of the PBoC. Here’s the process whereby banks use trusts to get balance sheet relief:

The amount of trust loans outstanding in China has ballooned to nearly CNY7 trillion (total trust assets under management is something like CNY14 trillion) and now, Hebei Financing Investment Guarantee Group - which, as Caixan notes, is "the largest loan guarantee company in the northern province of Hebei [and] is wholly owned by the provincial regulator of state-owned assets" - is apparently broke, and that’s bad news because it guaranteed some CNY50 billion in loans made by dozens of trusts who in turn issued wealth management products to investors. 

In short, if Hebei can’t guarantee the loans, WMP investors could be forced to take a loss and as anyone who follows developments in China’s financial markets knows, Beijing is not particularly keen on permitting SOEs to collapse - especially if there’s a risk of rattling retail investors’ fragile psyche. Here’s FT with the story:

Eleven shadow banks have written an open letter to the top Communist party official in northern China’s Hebei province asking for a bailout that would enable the bankrupt credit guarantee company to continue to backstop loans to borrowers. If the guarantor cannot pay, it could spark defaults on at least 24 high-yielding wealth management products (WMPs).


Hebei Financing Investment Guarantee Group has guaranteed Rmb50bn ($7.8bn) in loans from nearly 50 financial institutions, according to Caixin, a respected financial magazine. More than half of this total is from non-bank lenders, mainly trust companies, who lent to property developers and factories in overcapacity industries 


The letter appeals directly to the government’s concern about social stability and the fear of retail investors protesting the loss of “blood and sweat money”. The 11 companies sold 24 separate WMPs worth Rmb5.5bn.


“The domino effect from the successive and intersecting defaults of these trust products involves a multitude of financial institutions, an immense amount of money, and wide-ranging public interests,” 10 trust companies and a fund manager wrote to Zhao Kezhi, Hebei party secretary.


“In order to prevent this incident from inciting panic among common people and creating an unnecessary social influence, we represent more than a thousand investors, more than a thousand families, in asking for a resolution.”


Hebei Financing stopped paying out on all loan guarantees in January, when its chairman was replaced and another state-owned group was appointed as custodian.


Though Hebei Financing guaranteed loans underlying WMPs, the products themselves did not guarantee investors against losses. Caixin reported that several trust companies, fearing reputational damage, have used their own capital to repay investors. 


The 11 groups behind the recent letter have taken a different approach, pressuring the government for a rescue.

There a few things to note here. First, the reason the underling assets are going bad is because WMP investors' money was funneled into real estate development and all manner of other parts of the economy which are now struggling mightily. Second, the idea that China should allow for defaults on trust products is nothing new. In fact, we've been saying just that for at least a year. Finally, and perhaps most importantly, the banks' playing of the social instability card underscores an argument we made when China's equity market was in the midst of its harrowing plunge last month. In "Why China's Stock Collapse Could Lead To Revolution" we warned that "it is only a matter of time before all the 'nouveau riche' farmers and grandparents see all their paper profits wiped out and hopefully go silently into that good night without starting mass riots or a revolution."

Yes, "hopefully", but maybe not because as is becoming increasingly clear by the day, simultaneously micro managing the stock market, the FX market, the command economy, the media, and just about every other corner of society is becoming a task too tall even for the Politburo and sooner or later, something is going to break and shatter the "everything is under control" narrative.

Whether or not the catalyst for widespread social upheaval will be a catastrophic chain reaction in the shadow banking system we can't say for sure, but as FT reminds us, technical defaults on trust products have in the past been met with "public protests by angry investors at bank branches."

Here's a snapshot of WMP issuance (note the durations as it gives you an idea of what kind volume we're talking about on maturing products):

As you might have noticed from the above, it appears that maturity mismatch could be a real problem here. Here's what the RBA had to say about this in a bulletin dated June of this year:

A key risk of unguaranteed bank WMPs is the maturity mismatch between most WMPs sold to investors and the assets they ultimately fund. Many WMPs are, at least partly, invested in illiquid assets with maturities in excess of one year, while the products themselves tend to have much shorter maturities; around 60 per cent of WMPs issued have a maturity of less than three months (Graph 5). A maturity mismatch between longer-term assets and shorter-term liabilities is typical for banks’ balance sheets, and they are accustomed to managing this. However, in the case of WMPs, the maturity mismatch exists for each individual and legally separate product, as the entire funding source for a particular WMP matures in one day. This results in considerable rollover risk. 


In other words, the WMP issuers are perpetually borrowing short to lend long. The degree to which this is the case apparently varies depending what type of WMP (or trust product) one is looking at, and we will mercifully spare you the breakdown of the market by type (other than to include the pie chart shown below), but the important thing to note here is that it seems highly likely that at least CNY8 trillion in WMPs are exposed to the "considerable rollover risk" mentioned above.

Allow us to explain how this could end. If China allows a state-run guarantor like Hebei Financing Investment Guarantee Group (the subject of the FT article cited above) to go broke and that in turn triggers losses for investors in WMP products, demand for those WMPs will dry up - and right quick. If that happens, WMPs will stop rolling, freezing the market and triggering a cascade of forced liquidations of the underlying (likely illiquid) assets. 

It's either that, or China bails everyone out. As the RBA concludes, "a key issue is whether the presumption of implicit guarantees is upheld or the authorities allow failing WMPs to default and investors to experience losses arising from these products."

And while that is certainly a key issue, the key issue is what those investors will do next.

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TeamDepends's picture

Well, there is no rebar in the concrete.

turtle's picture

It's just like 2008 subprime MBS all over again... The Chinese are indeed expert imitators but unfortunately NOT as smart as many would like to think...

Ham-bone's picture

To show China's impending economic collapse...I'll use Japan, the previous exporting powerhouse, which funny enough, has the same demographics but just about a decade headstart on China in the population declines. 


Japan's population (total) peaked in 2005 and has fallen by 1.5%...however, that is entirely misleading.

To understand where Japan's population (consumer base) is going...look upstream (particularly because Japan nor China have net immigration, to speak of).

First look at the population of young (0-14yrs/old) has fallen 41% from the peak population hit in '79. There are presently 12 million fewer young in Japan...and it's still declining (the link details declining young and surging debt for Japan, China, Italy, & in part the US).  Note China's young population is now down in excess of 30% from its 1976 peak!

Then you can see the smaller young population in Japan is working it's way through the 15-64yr old segment, which is now down 11% from its 1995 peak (nicely coinciding with Japan's RE and stock market peaks). This segment will eventually likewise be down a full 40%!!! Or 40% fewer consumers...that is hyper-depressionary stuff beyond belief.

The only segment of the population still growing is the 65+yr/olds...those on fixed incomes and w/ significantly reduced spending in later years (ie, not "good consumers").

Japan's only answer for the declining demand has been to add credit / debt to pull forward future demand...unfortunately for Japan (and nearly all advanced and many developing countries...this was demand that was never to be). Debt to GDP rose from 30% in '79 to todays 237%+. There is no potential growth path to resolve Japan's debt.

Japan is economically ruined and the only hope is the Japanese people have the strength and resolve to reorganize and restructure without serious chaos.  China is plainly following down the same path.  The lowdown on China in the following link...

froze25's picture

You nailed it.  For China and EU you couldn't have an economic meltdown at a worse time, their demographics are horrible,  the US is not much different our demographics suck just not as bad in comparison.  Only the Emerging Markets aka Bricks have a light at the tunnel as far as population demographics are concerned.  My money is on India after the implosion.

max2205's picture

Borrow Dong and lend Dong 

Occident Mortal's picture

From the paddy fields to zombie banks inside two decades? Wow that's fast.


Where have the Masters of the Universe arranged for the worlds next super ponzi finanical bubble to emerge?


I think we only have Africa left?

old naughty's picture

uncontrolled experiment, not.

All according to agenda, including "pushes and shoves" (most recent one, er, you know...)

Buckaroo Banzai's picture

"No more yanky the wanky! Donger need food!"

Fahque Imuhnutjahb's picture

I thought Nassim Taleb used the term Black Swan, because it alludes to something unimagined and rare.  When China started blowing this bubble

many stressed that it was not sustainable so this would be more of a Canadian Goose event.

SoDamnMad's picture


Wrong. Europe will see tens of thousands of boat people cross the Mediterranean to sneak into Europe from the ME and Africa.

Of course, who will support them for decades is not currently understood.

EddieLomax's picture

The logic of demographics is inescapable, they will have 40% fewer consumers and therefore demand has to fall.

But they can go for growth, and try and push their population up ever higher, one area of the world is a world leader in that, not Africa, but the middle east where Saudi Arabia has 1/2 of its population at 18 and under and is hard baked in to reach a population of around 40-50 million in 20 years time.  While that will no doubt spark some fantastic demand growth, I expect that the result will be unsatisfied demand rather than resulting economic growth, this will cause instability and likely descend into chaos as desperate people demand change, which is what has already happened in most of the middle east where the Islam has organised humanity into the most efficient baby producing machine possible.

So China's choice is either to accept economic suicide and lower demographics, or go for population growth to fix things and end up with a large number of desperate citizens pushing the state into complete collapse.  The long term deal on offer is really about how to manage the contraction, I am going long on popcorn shares.

Ozkiwi's picture

Maybe China needs to bring back the one child policy - minimum of 1 child per couple - or 2 or 3... Then they can populate all those ghost cities they've built. 

Salah's picture

The Chinese damning by 'big data'.  All I know (& have made $$ with) is Pluto's now in China's 2nd House (Mao's founding), a lead-pipe-cinch of a shit storm....but wait, there's's also about to enter the USA's 2nd House (Sibley chart).

This could get real scary in a hurry...better have a bug-out location.


old naughty's picture

oh well, how much worse (than Rods of God) can it get, eh?

bentaxle's picture

Serves the Chinese and Japanese right for running state-sponsored ponzi schemes. All of a sudden there are fewer people around to pay in and kaboom! No other country would be so stupid! Ha wait.

What was it about that employee participation rate, er...thang?

PrimalScream's picture

that was an excellent Comment.  you are right. No inner strength in the system, no "building codes" to make sure the skyscraper does not collapse.

rubiconsolutions's picture

Let me see if I understand this: there's risk associated with having your entire economy based on the creation of debt? 

One And Only's picture

The FED is losing credibilty. But you can't short the FED.

Oh yeah...short GS and XLF.

Aside from that just short the companies that have been buying back the most shares.

To hedge go long bonds in good companies/countries; germany/usa/switzerland/nabisco/exxon/etc.

....yeah I'm short Goldman Sachs the vampire squid.

Never One Roach's picture

As long as they send their Asian Minx's here, I'm ok with more Asian immigration.

Son of Loki's picture

That's a very, very selfish reason.


But very, very understandable from where I sit.

LetThemEatRand's picture

Marc Faber may even come back at some point.

New_Meat's picture

If the Thai lbfmz will let him go ;-)

yrad's picture

They need the Chinese version of AIG!

Oh wait...

F0ster's picture

"the key issue is what those investors will do next."

Probably do nothing, paralysed through the fear of going to jail for trying to exit the matrix. 

yrad's picture

Bullish? I just don't know anymore.

The Ingenious Gentleman's picture

If I were in charge, and I saw the villagers sharpening their pitchforks while looking malevolently in my direction, I believe I'd start printing money right quick. 

Atomizer's picture

Airsoft or paint balls will annihilate these fucker's. 

World's smallest drone ready to take flight...

New_Meat's picture

gotta' b able to aim, then hit, don't cha' know.

And then watch out for the rest of the hive commin' afta' ya!

- Ned

DrData02's picture

Their police have guns, just like ours do.  Their police are there "to serve and protect" the top 10%, just like ours are.  Unless the police somehow become enlightened as to their (and their families') ultimate fate as this plays out, not much will happen.

jcdenton's picture

If we must talk about black swans, then we should give equal time to white hats ..

Yeah, it is a whole lot about China. Specifically when we blew it on Sept. 7, 2006. So what does a Dragon do in response to Aug. 12, 2015? You tell me. They are already thoroughly pissed about Sept. 7. When you have been around for ~3000+ years, one thing you do learn is -- patience ..

And it is about a whole lot more than 8 trillion ..

Demdere's picture

So clever to build in such a no-delay positive feedback loop into the base money supply.  Much more efficient than any previous banking system has managed, no wonder they could build so much so fast.  I bet China's bubble is the biggest ever.

NotApplicable's picture

Anything worth doing is worth over-doing.

After all, who hasn't kited a check or two? Or a few trillion...

buzzsaw99's picture

In order to prevent this incident from inciting panic among common people and creating an unnecessary social influence, we represent more than a thousand investors, more than a thousand families, in asking for a resolution...


F0ster's picture

So what happens when the money the Chinese banks lent out to small businesses who summarily used that money to bet in the Chinese stock market and thusly lost it and now need to service said debt?

OC Sure's picture




Unless a clear definition of WMP is identified then  the crux of the issue noted as "The main issue here is the sheer size of the market" is false. 

Come on, ZH! Is not the main issue here whether or not a WMP comes forth from value or is it the imitation of value?

(Does ZH stand for ongoing corruption or the establishment of virtue?)

gregga777's picture

The issue is whether or not the investor receives his or her principal and interest when the WMP matures. Or, are you the kind of investor that just smiles and shrugs their shoulders when you loses our principal and interest?

bluskyes's picture

Talked to a buddy today who sells manufacturing equipment to China. Business was booming, until the payments stopped clearing. This wasn't a problem, until it happened to 5 sales in a row. The promise of full faith and credit is getting hollower by the day.

The Ingenious Gentleman's picture

Yeah, that's the scary part. When credit stops, almost everything but barter stops I guess. See Greece.

holdbuysell's picture

So these investors want above market returns with zero risk. And the guv is going to give it to them to maintain the status quo. Got it.

At this rate, in a few years' time, the word 'failure' will be erased from all languages worldwide.

What a farce.

MayIMommaDogFace2theBananaPatch's picture

They won't eliminate the word 'failure' -- they will just change it to 'Caitlyn'

bluez's picture

What Does

It Matter?

Total collapse would destroy the USSA because: we have a complex  society of overspecialized people.

China has a primitive society of versatile people.

We will all self-destruct. The Chinese will just roll with it.

Total collapse is not such a big deal when the people are used to hardship.

Salah's picture

Good point.  But they all left the countryside for the big city....major mistake.

gregga777's picture

You exhibit an appalling ignorance of Chinese history and the Chinese people.

Montani Semper Liberi's picture

 According to the, "Three years ago, for the first time more than half of China's population was living in urban areas rather than the countryside. In five years, the country's urbanization ratio will hit more than 60 percent".

 Top 5 cities by population:

 Guangzhou 44,290,245

 Shanghai 27,965,403

 Beijing 19,785, 051

 Shenzen 10,357,938

 Tianjin 10,290,987 (Less a few hundred by now.)

  According to the UN's food and agriculture organisation, China must feed a fifth of the world's population with about 7% of its arable land.

Meanwhile, nearly 20 percent of China's farmland has been polluted by runoff from industrial waste and/or excessive agrichemicals.

 China would be devasted along with the west. Maybe peasant farmers are about the only segment that would be able to 'roll with it', providing they don't have hordes of starving people at their front door and ravaging their fields.

RagnarDanneskjold's picture
Lots of history on credit guarantees here. What you see here is only the surface, behind it there is undoubtedly far more credit risk and potential defaults.  The Credit Dominoes Are Falling Again; Northeast Faces Deflationary Collapse Without Bailout
Fuku Ben's picture


Back in the early 2000's I remember seeing some astronomically large numbers relating to the Chinese shadow banking system. The Chinese right now are trying to juggle many things simultaneously. All of which could result in major problems. But they also appear to be taking the most diverse advantage of hedging against their future financial problems i.e. BRICS, access IMF, large Gold accumulation.


As always I'll point out the obvious. Other than the global beneficiaries of the planned collapse everyone else is prepping for solutions that are at best regional. That's a losers game. Even if they survive the collapse they won't be able to make any major financial recovery for a long time. If the violence doesn't consume them or escalate globally the local and regional protectionism will stifle significant financial growth and recovery.


A global solution that prevents the collapse and subsequent outcomes and replaces it with something that can work globally will be the best chance to have a positive outcome for everyone. Unfortunately I'm still seeing far too many at the top go right along with the current plan. And based on my insight of the current plan and schedule even fully embracing a positive change now could be difficult to transition especially if that plan can't be stopped. And as I've pointed out before there will undoubtedly always be a few that would try their best to prevent something positive for everyone up until the end even if everyone else agreed.


I'll withhold specifics and dates for now. Let's just say you want to maximize or finalize your family preparation efforts if you haven't already done so. For those just starting find someone who is far along in their preparation plan. They will be able to best help you figure out what to do.