Rehypothecation is a banking process that pledges a single asset against multiple borrowings. It is behind all of the great financial booms and busts of history. It was the heart of the US sub-prime bubble as worthless assets were pledged against enormous quantities of structured products. It is the heart of the Australian housing bubble in which investors use one property to secure the next and where banks are allowed to revalue assets upwards on their balance sheets to secure more leverage.
Yet it appears that both of these examples pale next to what has transpired in China. According to Reuters, the heart of the great Chinese credit bubble is neither bad credit standards for an exploited poor nor systematically over-inflated assets. At the heart of the Chinese credit bubble is…well…nothing…
The banker at the other end of the phone line was furious, recalled Shanghai lawyer Wang Chaoyu. A pile of steel pledged as collateral for a loan of almost $3 million from his bank, China CITIC, had vanished from a warehouse on the outskirts of the city.
