Worries about the health of China’s financial sector have been eased by today’s news that a high-profile default has been avoided on a troubled RMB3bn trust product (“Credit Equals Gold No. 1”). In the short term this is a victory for officials worried about the threat of contagion. The trust sector itself is still small but the shadow banking sector, of which it is a part, contributes nearly as much as bank loans to credit growth. But this is not an outcome that anyone should be particularly comfortable with. Occasional, small defaults – particularly on risky, high-return products such as this – are preferable to the large-scale delinquency that will follow if investors see little need to pay attention to credit risks.
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