While there are some fears about the bursting of the housing
asset bubble in China, many feel that the biggest risk in fact lies in the
growing shadow banking sector. It is, however, worth keeping in mind that
China’s overall debt levels are still well below that of UK or US. As The Economist recently noted:
" The main reason why a
calamitous run on Chinese shadow banks is unlikely, however, is that the
country has the capacity to absorb lots of non-performing loans. Its debts,
both shadowy and well-lit, are much smaller relative to GDP than they were in
most Western countries before the crisis struck. More important, China’s
central government and the big state-owned banks are still in rude financial
health and could intervene to buy up troubled assets, preventing the credit
market from seizing up. Currency controls would stop panicked Chinese from
spiriting their money out of the country."