As with China's fiscal economy, the banking system is also a complete mess. Since the beginning of the last decade banks and non-bank lenders had already embarked on one world-beating credit bubble, taking debt ratios up to unprecedented levels and funneling funds through the worst small and medium regional lenders to the worst borrowers in the process. And while the authorities have acted in recent years to reverse some of the most egregious structural excesses, they have not been able to stop the bubble itself, as China's huge fiscal and quasi-fiscal deficits require banks to keep lending at all costs ... with the result that debt levels continue to spiral upwards in an unabated fashion.

This naturally raises the question: How has China escaped without a systemic financial crisis to date? I.e., the kind of "sudden stop" funding shocks that brought down other crisis economies, with mass defaults on liabilities, spiking rates and tanking currencies? And what would it take to send China over the edge going forward?

Our answer is that the game can and will continue for a long time to come. Here are the three key pillars of financial stability in China:

1. A closed capital account. For starters, China's hermetically closed capital account means virtually no exposure at all to foreign funding flows and no way for domestic savings to leave the system.

2. The end of shadow lenders and the consolidation of banks' monopoly. Another key factor has been (i) the sharp contraction in "shadow" lending balance sheets in recent years, cutting them off from credit intermediation and thus financial risk in the economy and (ii) the accompanying crackdown and consolidation of smaller local banks and cooperatives, pushing savings and deposits back into the traditional large state banking sector.

3. Iron-clad policy support via the "PBC put". Third, and in our view most important, the PBC has been underwriting every part of the financial economy with its own version of QE and continues to do so today. As a result there have been virtually no financial defaults over the last ten years, and now there are no corporate bond defaults as well.