The Most Important Question in the World: Have the Chinese Translated Bagehot?

This is the most important question currently facing investors: it is even more important than the question whether China is truly easing or not? Bagehot was a nineteenth century economist, author of Lombard Street and the architect of the key Central Banking doctrine of Lender of the Last Resort. China’s problem is highlighted in the chart below. Shadow bank lending is cratering and many domestic banks look troubled. Shadow banks supply roughly one-third of total Chinese credit. Chinese credit itself totals nearly US$25 trillion or close to a quarter of total Global Liquidity. China is plainly important economically, but she could be more important financially. Put another way, could there be a Chinese equivalent of the Lehman Bros. failure in coming months? China’s People’s Bank (PBoC) plainly has muscle: its balance sheet is now one-fifth larger in nominal terms than the US Federal Reserve’s. But will it use its power to bail-out troubled institutions?