The spectacle of Chinese shares in freefall last week gave rise to a sense of schadenfreude among many western observers who remember complacent Chinese statements about the superiority its financial system in the wake of the global financial crisis.
Such satisfaction is understandable. Rarely have regulators and government officials appeared as desperate and out of control as in recent days, with their efforts to slow a bull market becoming a frenzied multi-pronged effort to arrest a plunge they had failed to anticipate.
Among the many reasons for falling share prices was the role of shadow banks in providing leverage to investors who were happy to borrow money and bet on ever rising share prices. And while few outside observers made the connection between the shadow banks and this particular source of vulnerability, hadn’t the pundits warned all along that the shadow banks would ultimately come to haunt Beijing? One big bank chief executive has referred