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China Shadow Banking Crisis Could Dwarf Subprime Meltdown or Greek Debt Debacle

Unofficial lending could become a far-reaching poison


It doesn’t end there. Consider that, according to Financial Times, “more than a quarter of pretax profits at China’s Yangzijiang Shipbuilding Holdings in the second quarter came from an unexpected source — not its core shipyard business, but from lending money to other companies.” This shows that it’s not just individuals cashing in on shadow banking, but corporations, too.

Remember how investors thought General Electric (NYSE:GE) was bulletproof due to its massive operations, and how the subprime crisis eviscerated the stock and resulted in a 68% dividend cut due to bad loans at GE Capital? Yeah, that’s what’s going on in China right now.

How This Affects You

There are those who think this is all hyperbole, that the shadow banking system in China isn’t this bad — or that Beijing’s acknowledgement of the risks presented by this informal lending earlier this year is a sign that China is ahead of the curve and will right the ship.

Maybe. But it’s going to be a very difficult task to extricate shadow banking from China’s red-hot economy amid tight banking policy and high inflation. It won’t be done overnight, and it will involve far-reaching changes across many aspects of the Chinese economy.

To make matters worse, this isn’t just a China problem. The fate of the west — and all of our investment portfolios — is closely linked to the fate of China’s growth. American corporations from McDonald’s (NYSE:MCD) to General Motors to Apple (NASDAQ:AAPL) have made big investments in China on the premise that impressive growth there will continue for many years to come.

Let’s all hope there isn’t a shadow banking meltdown in China. Because if there is, the ripples will be felt all over the world as the biggest engine of economic growth breaks down.

Investors leery of a shadow banking meltdown would be wise to reduce their direct exposure to China — particularly Chinese consumers. In short, if you want to buy GM because of its operations and sales beyond China, go ahead. But don’t depend on Cadillac sales in Beijing to make you rich. Similarly, don’t buy Apple because of iPhone sales in China — buy it because you believe growth in enterprise sales will surge in the coming years.

Or if you’re willing to roll the dice on China, make sure you have an exit strategy and that you use stop-losses to protect yourself. As we saw in the fall of 2008, when the crisis hits, it can hit fast and erase your wealth in a hurry.

Jeff Reeves is the editor of Write him at, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook. As of this writing, he did not own a position in any of the aforementioned stocks.

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