While various Chinese bubbles have already burst in recent years, including those in the real estate, stock market and fixed investment sectors, so far the credit and shadow banking bubbles linger on with bond yields recently touching on record lows as the money invested in the various other bubbles has migrated into various forms of fixed income, including investment companies which promise exorbitant returns.

The reason why this particular bubble has proven so resilient is because up to this point the government has been willing to directly or indirectly bail out the participants. However, as Bank of America’s David Cui writes today, that may not be the case for much longer.

Take the case of Shanxi-based shadow bank Xinsheng. As CBN writes today, this is the latest shadow bank to collapse, a bank whose Shanghai subsidiary alone sold RMB1.9 billion in wealth management products to over 5,000 investors and is now unable to return the funds.  As Chiecon writes, the company marketed “asset securitisation” wealth management products promising annual returns between  13%-24%. In reality, client funds were diverted into real estate projects, mainly office buildings, in lower tier cities, where chronic oversupply has depressed local property prices. Some investors are now protesting outside the company’s Shanghai branch office.

As Bank of America adds, as large as Xinsheng’s sounds, it pales against some of the other recent defaults in the lightly regulated P2P and private wealth management product markets. For example, in July 2015, a commodity exchange, Fanya, defaulted on Rmb43bn, involving some 220k investors nationwide (Yunnan News, Feb 5); in Nov, a P2P platform, Caifu Milestone, defaulted on Rmb5bn from some 75k individuals (China Business News, Jan 11); in Dec, a P2P platform, eZubao, defaulted on Rmb50bn from some 900k investors (New Beijing News, Feb 1); in Jan, a P2P platform, Rongzicheng, defaulted on Rmb1.5bn (Economic Information, Jan 26); another P2P player, Shengshi Caifu, defaulted on Rmb2bn from some 7k investors (Rong360, Jan 21).

The charts below show BofA’s estimates related to the default cases in the shadow banking sector, based on media reports of high profile actual default cases. What is notable is that while the number of reported cases has remained relatively low, the size of the blow ups has soared in recent months.

So far, none of the six cases mentioned above in the P2P and private wealth management product markets have been resolved, and there has been no clarification from the companies or local governments on potential solutions. Unless the government decides to bail investors out, large losses could ensue, Cui warns.

Previously, defaults mainly occurred in more stringently regulated areas e.g. trust and bond, and involved financial institutions with large balance sheets. The cases were often resolved in investors’ favor.

In a scenario in which investors are not bailed out and thus become more cautious, eg, rolling over some of the debt instruments in the shadow banking sector, some borrowers may struggle to obtain credit, for example, developers and coal miners.

Whether this scenario would trigger a chain reaction is a key risk that needs to be monitored.

Moreover, given the default pressure in the trust and bond market markets as detailed in the list of defaults at the end of this article, cases may emerge there eventually.

The paradox, as Cui concludes, is that if shadow banking investors continue to be bailed out, this would imply a further strengthening of the implicit guarantee, and potentially, put pressure on growth, increase the debt burden and hurt RMB stability.

BofA’s conclusion: “financial system risk is arguably the most important risk facing market this year. Until the debt issue is addressed, we believe it is unlikely we will see the bottom of the market.“

We don’t know, but we find it disturbing that suddenly a whole lot of banks around the globe – from Germany to China – are being watched very closely as a potential catalyst that will spark the next crisis. Wasn’t the entire point of the 2008/9 bailout and subsequent injection of trillions in central bank liquidity to ensure that precisely this scenario does not occur?

And speaking of defaults of either plain vanilla companies, or shadow bank trusts, here is a brief list of all recent Chinese defaults: how long until the the losses from any one of these – or some upcoming default – are simply too large for the government to pocket, and the inevitable “chain reaction” is finally triggered.