Concern over whether China is heading for a Lehman moment stems from the failure of Baoshang, the biggest lender in China’s Inner Mongolia province with Rmb536 billion of total assets, and the market reaction to it.
To deal with the headline first: talk of a Lehman moment for China is not the right comparison. China’s financial system, while certainly interconnected, doesn’t operate like the US one, and while counterparty suspicion certainly exists – we’ve seen it in recent weeks as banks have been unwilling to lend to smaller, apparently risky banks – ultimately the state controls the entire sector and can order even its private sector institutions to do what it wants if stability is at stake.
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