Black Holes at China's Shadow Banks

When I speak of cracks in China's institutional foundation, I'm thinking in large part of China's banking system -- which as far as I can tell, isn't really a banking system the way that we think of it.

Banks are controlled by the government, with interest rates for both deposits and loans set by fiat. The government also feels free to tell banks how much to lend, and to mandate that they buy government bonds at particular prices. When I went to China in 2010, one of the bankers there told us that a huge chunk of their Tier One capital consisted of special government bonds that couldn't be sold and paid about 5 percent interest -- at a time when inflation was, according to most of the experts I talked to, well above that.