Is China in trouble?

For the past week, it seems as if the world's so-called economic engine – China – has shown signs of sputtering. Whether it's indications that non-performing loans on the local level have been rising, liquidity in the nation's banking system has been drying up or fears about an economic slowdown, there's been a steady stream of bad news that threatens to send global investors into a full-blown panic. Yet do these developments suggest that China's once-mighty growth model is falling apart?

Some would say yes, as shown by the Shanghai Composite Index's 5.3 percent plunge on June 24. Even more concerning is a rare statement by the People's Bank of China on liquidity levels in the system, with officials stressing that price support in the Communist nation's economy remains strong. Yet the situation in China is both similar to the one in the United States and wholly different in its own unique ways.

Making sense of China's problems

Like the U.S., China undertook a massive monetary stimulus program in a bid to beat back the worst impacts of recession following the 2008 financial panic. One of the differences, however, was that instead of focusing its attention on just banks and investors, the Chinese government offered a massive amount of loans to businesses in a wide range of industries. While the full justification for these actions has never been completely disclosed, it is believed that China feared mass unemployment more than American authorities died.

Yet in the years since 2008, China's economy has developed problems eerily similar to the ones that emerged in the United States during the 1990s and early 2000s, most notably the rise of the so-called "shadow banking" system. This phrase refers to the murky, less rigorously disclosed dealings between larger and smaller firms, actions which both extend lending far beyond the normal worth of valuable assets and suppress funding risk levels. While during good times these arrangements are considered by some to be fruitful – and extremely profitable – shadow banking activities have been compared to kindling for a financial fire. Credit default swaps – the insurance model which many blame for the 2008 panic – are just one side of what shadow banking can do.

China's uncertain path forward

Even if China's liquidity problems are only transitory, they couldn't come at a worse time. The Communist Party of China has nearly completed a leadership transition and is more than loathe to avoid a flare-up of macroeconomic pressure. Part of this process involves a slow but steady realignment of the Chinese economy, as a growing middle class produces a new generation of consumers. Global businesses are looking to these opportunities to boost flagging consumer performance in the United States, and disruptions in China could imperil these efforts further.

Some economists believe that the Chinese government, if it acts decisively, could head off any major issues stemming from an internal financial crisis. Eric Fishwick, an economic research professional in Hong Kong, told the Los Angeles Times in an interview that he believes that China now benefits from having a more proactive administration.

"They've deliberately tried to engineer a short squeeze to correct what they see as a mispricing of risk… to generate a bit of discipline," Fishick said. "There has, I think, been a shift in the attitude of the Chinese leaders, a more dramatic shift than one might think given that this historically has been a very gradual political change process. There is much more focus on risk minimization and improving the quality of growth in sectors, rather than protecting a single [economic growth] figure."

Investors should keep a close eye on their portfolios, as many industries have at least indirect exposure to Chinese assets and interests. has a number of resources that can be utilized to maximize returns, especially for those who are using independent measures to protect their means of retirement.