What's better than a white elephant?

A Golden Elephant! (number 38)

The Chinese investment vehicle known as "Golden Elephant No. 38" promises buyers a 7.2 percent return per year. That's more than double the rate offered on savings accounts nationally.
Absent from the product's prospectus is any indication of the asset underpinning Golden Elephant: a near-empty housing project in the rural town of Taihe, at the end of a dirt path amid rice fields in one of China's poorest provinces.

The Reuters report linked is a terrifying dive into the murky depths of the Chinese shadow investment economy, where the dreadful returns available from the regular banking system have resulted in all manner of high-risk high-alleged-return products springing up for the Chinese middle class to invest in.

This has been going on long enough that some of the problems are beginning to manifest:

China Credit Trust Co, one of the country's biggest trust companies, has disclosed that one of its wealth funds, Jinkai #1, is at risk of default because of money it lent to coal company Zhenfu energy Group. Zhenfu's boss has been arrested, amid reports he owed a total of 500 million yuan.

At least there are very real consequences for large-scale financial fraud in China, involving a brick wall, a wooden post, a blindfold and a last cigarette (perhaps the FSA might like to investigate this approach, though presumably the cigarette might be a problem in today's Prohibitionist society.) However, first the fraudster has to be caught and blamed, and presumably the smarter fraudsters are busy paying off the police and local Party officials to ensure that they waltz away and leave a suitable underling in the firing line.

The really terrifying bit is the short duration of the financing involved. When many products have maturities measured in months, once consumer confidence starts to shake the wheels are going to come off with uncomfortable speed:

"One of the key problems is that short-term financing is being used to pay for a long-term project," said May Yan, head of China bank research at Barclays in Hong Kong. "Infrastructure projects should be funded by long-term bonds. Unfortunately, China doesn't have that."

One of the reasons the UK hasn't suffered more in the current crisis than it might have done is that much of its debt was in relatively long-term (10+ year) bonds, allowing a lot of time to reorganise finances and austerise itself out of any hole in which it found itself. Chinese banks and state entities are spinning round and round, faster and faster, in an ever-tightening finance circle. When they reach the limit of what's possible, the resulting explosion is going to be ugly - and it's going to felt everywhere around the world where the Chinese are buying or investing.

Fortunately, we are assured there's no actual problem.

"On paper, these are not principal guaranteed but you don't have to worry about that," said a wealth manager at a local branch of Bank of Communications, China's No. 5 lender. "All our clients who've previously bought these products got their principal plus interest back."

Why am I thinking of Lloyds Names here? What could possibly go wrong?

[ Hat tip: The Streetwise Professor.]