Third is domestic liquidity. China's domestic credit expansion has been driven by domestic, not foreign funding. A critical difference between China's and the US banking system at the onset of the Lehman crisis is that the former does not rely on wholesale funding for credit growth. System-wide loan-to-deposit ratios in China now average below 70 percent, are lower for the bigger banks and remain comfortably below 100 percent even after adjusting for off-balance sheet credit. A high savings rate, under-developed capital market and still largely closed capital account mean that most household and corporate savings remain in China and mostly in bank deposits - which is where funds will return in the event of a shadow banking confidence shakeup.

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We note that some smaller Chinese banks may have become reliant on wholesale interbank funding in the past couple of years (for example, up to 25 to 30 percent of funding needs for some listed smaller banks). What matters more from a system stability perspective, however, is that none of the big systemically important commercial banks is reliant on wholesale funding.

Fourth is the fact that China's banks remain largely State-owned and backed by a government with ample fiscal capacity to help out should the need arise. State ownership also means that most defaults in China will continue to be handled via drawn-out negotiations and protracted restructuring processes, not a rapid market-driven fire spread. In contrast to many emerging economies, China still has a sizable current account surplus, large foreign exchange reserves and a largely closed capital account - all of which should help to limit the damage that a default challenge can inflict upon the stability of China's financial system and currency.

Simply put, a systemic banking crisis is not in sight. Should a cluster of defaults trigger a credit squeeze, China's authorities have more than enough resources to prevent an escalation into a system-wide crisis. This is not only because of its strong fiscal balance sheet, ample domestic funding and State ownership interest in banks, but also because of the fundamental differences between the defaults facing China today versus those facing the US banking system a few years ago.

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