China's Shadow Banking System To Face Its First Real Test

The Chinese shadow banking system faces its largest test to date, with the impending default of a large wealth management product. With current conditions not conducive to a traditional bailout, outright default of the so-called CEQ1 product seems to be the most likely outcome. Given the opaque nature of China's vast shadow banking system, and the sheer volume of trust products issued in recent years, default would likely see a great deal of contagion. Indeed, despite the widespread belief that the People's Bank of China (PBoC) would act to contain any financial sector instability and prevent a systemic financial crisis, this is by no means guaranteed.

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