The Credit Guarantee scheme has been a very popular form of shadow banking in China. How it works is that company A acts as a guarantor of company B's loans. In turn, some subsidiary of company B acts as a guarantor for company A. If either of the company went bust, banks would end up calling loans for every company in the chain. Since these companies too might have guaranteed loans for others, more companies get into trouble. This therefore ends up becoming a viscous cycle of loan defaults. As per Money news, rating agency Moody's has cited a warning signal on China's thriving shadow banking system which poses systemic risks. The nation's financial industry has expanded by more than 67% over the past two years. But the same has been on the back of many compromises on asset quality. While the rating agency has just pointed at the tip of the iceberg, we will not be surprised if a full-fledged financial crisis shows up in due time.