Shadow Banking

Weak data from China and Japan has led to a sharp sell-off in Asian stock markets and the biggest one-day crash in iron ore prices since the Lehman crisis, calling into question the strength of the global recovery.

The Shanghai Composite index of stocks fell below the key level of 2,000 after investors reacted with shock to an 18pc slump in Chinese exports in February and to signs that credit is wilting again. Iron ore dropped 8.3pc.

Fresh loans in China’s shadow banking system evaporated to almost nothing from $160bn in January, suggesting the clampdown on the $8 trillion sector is biting hard.

“It seems that rising default risk has started to erode Chinese investors’ confidence,” said Wei Yao, from Societe Generale. “Together with continued regulatory tightening on banks’ off-balance-sheet activity, we are certain this slowing credit trend has further to go and will inflict real pain on the economy.”

Japan’s economy is losing steam as the monetary stimulus from “Abenomics” wears off and the country braces itself for a rise in the consumption tax from 5pc to 8pc. Economic growth slumped from 4pc in early 2013 to 0.7pc in the fourth quarter, while the country racked up a record trade deficit.

The renewed jitters in China come after the authorities allowed solar company Chaori to default last week, the first ever failure in the country’s domestic bond market. “Such adjustments are necessary for China in the long run, but are nothing if not risky in the short term,” said Ms Wei.

China accounts for half of all the $30 trillion increase in world debt over the past five years.

China invested $5 trillion last year, as much as the US and Europe combined. There are already signs that the country is trying to export its over-capacity overseas by pushing down the Yuan.