The threat of a collapse in the shadow banking market looms over China like a hawk swooping down on its prey. Shadow loans are made outside the formal banking system and are only lightly regulated, making them a significant source of financial stress if the Chinese economy slows significantly. One of the biggest source of shadow loans, Trusts, is showing signs of weakness that could turn into a big problem for China’s economy.

There now is a staggering Rmb 11.7tn in outstanding Trust loans, approximately one-quarter of the entire shadow banking market. Using a list of 31 failed Trusts supplied by the Central University of Finance and Economics in Beijing, we examined them to see what they tell us about the fate the entire Trust industry – and by extension shadow banking in China.

What we found is a disturbing harbinger of things to come for China’s economy.