Over the past six months, analysts working for Argyle Street management have been fanning out across China to visit local bank branches. Argyle, a Hong Kong-based hedge fund, wanted to know more about some of the products these banks were selling to their clients – in particular high-yielding wealth management products.

It quickly became apparent that these products were very popular with the banks’ clients and it was easy to see why. They paid yields above 7 per cent, far more than the meagre amount offered on deposits. Less apparent was what these clients were actually investing in, or under what terms.

Some involved loaning money to buy land for property developments, despite banks not being allowed to lend money for land acquisition. Others involved investing in the pet projects of local governments, such as building roads in remote border areas or the debt of water pipelines. In many cases, the loans being offered to potential investors had virtually no conditions to protect the lenders, while the collateral – if there was any – often consisted of unnamed items or personal guarantees.