ICBC, the world’s largest bank by assets, has announced it won’t take responsibility for a trust investment worth $300 million that may go bust. In other words, one of China’s ‘big four’ banks may be linked to a default on a loan pretty similar to the sort that started the Lehman crisis in 2007.
In fact, it may be worse, due to the lack of transparency. The troubled Chinese loan was sold through a trust company that belongs to the nation’s vast and opaque shadow-banking system, which offers credit to companies that might find it hard to raise money otherwise. Many of these trust loans are of the convoluted, ‘structured’ kind that sparked Lehman’s downfall and rocked the world. China’s total shadow-banking debt now equals $4.8 trillion — when you consider that Beijing now holds a record $1.3 trillion in US Treasurys, you can see the global wave of financial unravelling that may arise.
Even if the state governments, along with ICBC, agree to cobble together a last-minute bailout, it’s only a matter of time before we see the first trust loan defaults emerging, shaking faith in China’s increasingly creaky banking system.