The spectacle of Chinese shares in freefall last week gave rise to a sense of schadenfreude among many western observers who remember complacent Chinese statements about the superiority of their own financial system in the wake of the global financial crisis. Their satisfaction is understandable. Rarely have regulators and government officials appeared as desperate and out of control as they did in recent days, with their efforts to slow a bull market becoming a frenzied multi-pronged effort to arrest a plunge they failed to anticipate. Among the many reasons for falling share prices was the role of shadow banks in providing leverage to investors happy to borrow money and bet on ever rising share prices. And while few of these outside observers made the connection between the shadow banks and this particular source of vulnerability, hadn’t the pundits warned all along that the shadow banks would come ultimately to haunt Beijing?