[hangonhn]

If someone say it for long enough, they're bound to be right one day. It's the same about the decline of the US.

All we can do is judge them on a case-by-case basis.

In this case, it's really hard to judge because the threat, similar to the US credit crisis, is hard to measure. China has a really sizable foreign reserve that some people think will buffer any economic crisis. However, some estimates of the shadow banking system puts it well beyond its reserves. That said, not every loan in the shadow banking system will go bad. It just means the loans were made off the books. One can reasonably assume that the lender did his work and made loans that have a decent chance of success. Also, I don't know what falls under some of the definitions of shadow banking. The Chinese have been loaning each other large sums of money for generations. This "tradition" is one of the theories put forth in the rise of overseas Chinese communities and their dominance in business in those areas. Anyways, my point is that it's not all doom and gloom. The threat is there but don't panic yet.

[AJ007]

The problem with leverage is that you don't need a 100% failure to be wiped out. This is why the US crises was not very surprising, the investment banks had upwards of 1:30 leverage ratios. Similar things were happening to real estate investors.

So no, not all of the loans will go bad. But, some go bad. First prices stop growing. No growth? Why borrow to buy? Next prices drop, and then suddenly a lot of loans that should have been ok are worth far more than the underlying assets. Then it is just a big mess.

Think of a credit bubble as a game of musical chairs. The people who borrow money at the end always lose (also the ones that lend money.)

[hangonhn]

Yes a good point.