A shadow banking crisis in China is not an outlandish fear. The country has already been dealing with one for the past year.
Many of the illegal loan shark operations in wealthy coastal areas, especially those in Wenzhou, an entrepreneurial hub south of Shanghai, have imploded. Long chains of underground financing deals, often based on predatory interest rates, collapsed as exports weakened and property prices tumbled.
The fallout has been severe and it has begun to hit the formal banking system. Chinese media have been full of stories of Wenzhou factory bosses absconding with unpaid debts, while residents tell of a few who have jumped from their office towers. The city’s courts heard 10,269 economic disputes, most related to loan defaults, in the first half of this year, almost twice as many as last year.