The only thing more mysterious than Byzantine politics is maybe Oriental business practices. It is a strange combination of complexity and opacity, sprinkled with a heavy dose of dishonesty, that is forever off-limits to the Western mind. A good example is right here. In the West, a firm struggling to pay its bills and threatening to default will do so in a very public fashion. If the regulators take over, they perform a public audit, liquidate the assets and pay creditors based on an agreed upon framework. If the firm goes into bankruptcy, that is also a public process. If a white knight comes in and puts up a bunch of cash, then we learn who it is and why they are coming to the rescue. It is not perfectly transparent, but the public and interested parties will know enough to judge the results.

In China, the banking system is a mystery to even the people in the Chinese banking system. China Credit Trust Co has no money of its own. It sold a product to investors promising a ten percent return on loans to a firm that has no money to repay the loans. They can dress it up in the popular lingo, but that’s the bottom line. Zhenfu Energy, desperate for cash, went to private firms to borrow money at rates well above market. China Credit Trust Co appears to have created a product to be sold to retail banking customers to funnel money into the struggling energy company. It was a fraud, but most of modern banking is a fraud. Now that the energy company is defaulting on the loan, China Credit Trust Co cannot pay the retail investors their promised return.

This was all supposed to happen at the end of the month. Today a mysterious and undisclosed white knight has arrived to supply the cash. Everyone knows the white knight is the Chinese Communist Party, but no one will dare say it. It is simply a “restructuring” that papers over the problem for now. A month from now some mid-level functionary will kill himself and everyone will know why, but no one will dare say. It is no way to run a modern economy, but that’s another thing everyone knows, but no one dares say. Instead, the West looks the other way and hopes those inscrutable Chinese keep buying up the useless paper the credit machines keep emitting every month.

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