Lending by non-bank institutions such as trusts, leasing companies and pawnshops, which accounted for 4 percent of loans in China in 2002, according to estimates by Barclays Plc, could rise to 55 percent of the total next year, Fitch estimated in a July report. The ratings firm said all lending in 2011 will increase to 18 trillion yuan from 16.5 trillion yuan in 2010.

"Trusts are facilitating the movements of assets off the balance sheets of banks -- there are no regulations on where it can go," said Charlene Chu, a Fitch analyst in Beijing who co- wrote the report. "When there aren't enough guidelines, who knows what's going into this stuff?"

The shadow-banking credit boom could lead to a new pile of bad debt. Almost half the money managed by trusts is invested in infrastructure and real estate projects, according to figures from the China Trustee Association, an industry group. Local governments had 10.7 trillion yuan in debt borrowed through financing vehicles at the end of last year, according to a June report by China's National Audit Office. Nearly a third of those entities are losing money, according to a study by Beijing-based analysts Zhang Xu at Guosen Securities Co. and Qiao Wei of China Asset Management Co.

Eoin Treacy's view The wide spread between lending and deposit rates, absence of a deep bond market, the government's focus on infrastructure development, central government capriciousness and local government dependence on land sales contribute to a speculative bias among Chinese investors.

Companies with no knowledge of finance should probably avoid making loans, particularly into industries they know nothing about. The initial growth and subsequent problems with these trusts is probably a symptom of tighter lending criteria imposed on the banking sector. The private trust sector has been brought to light by the collapse of private lending in Wenzhou, which is a major export oriented manufacturing hub. I'm flying there on Friday and looking forward to seeing the situation first hand.

Prior to the financial crisis, General Motors and Harley Davidson made more money from selling finance on their vehicles than from manufacturing. Both shares pulled back sharply since 2007. While the issues with private trusts is only now coming to the attention of Western investors, most of China's finance related shares have been very weak for a number of years. This is not new news in China. The FTSE Xinhua A600 Banks Index remains under downward pressure and will need to break its medium-term progressions of lower rally highs, with a sustained move above 10,000, to question potential for further lower to lateral ranging.

I can't help but wonder how much of the current state of heightened anxiety in the Chinese stock market and wider economy is already in the price. I have had a large number of extraordinarily bearish reports focusing on China cross my desk of late. They all make the same points. Copper prices have fallen so China's economy must be about to collapse. Chinese companies such as Sino Forest are highly questionable at best. The most prevalent is that the property market is a horrendous bubble which is about to pop and take the global economy with it. Apart from the copper argument which I suspect is more a question of deleveraging among carry traders, the other points are potential issues although neither are timing tools and these are well known problems.

As an aside General Motors has declined steadily from its IPO price, but has lost downward momentum, posted daily and weekly key reversals in the last few days and is challenging the progression of lower rally highs. Potential for an additional relief rally has increased substantially and a sustained move below $20 would be required to question this view.