In a time of suffocating, crushing market complacency (which has made the lives of financial analysts so boring, they have even quantified what complacency is), a pet hobby that has emerged within the financial community is to find new possible sources of underappreciated systemic risk. One such attempt comes from BMO’s Mark Steele who notes that aside from the pressure that the short to medium end of the curve is dishing out as Central Banks turn hawkish, “the market dishes out some of its own early signals of a more important nature.”

Steele says he created a basket of Chinese Bank CDS to look for systemic risk there, and yesterday it notably broke above a narrowing trend – Exhibit 1.

Breaking the basket down, BMO highlights China Construction Bank as the key member that shows the greatest, albeit liquidity induced, “breaking bad” spike – Exhibit 2

Here, Steele will stop readers before they go asking about BofA, or SocGen, credit risk, to say that the bank’s systemic risk basket sleeps like a baby. His spin would be to tell you that it seems an opportune time to buy protection – Exhibit 3.

So is a Chinese bank the potential source of the next systemic risk? His answer: “The systemic risk problem this time round won’t come directly from a Chinese bank. The potential Lehman will come indirectly. We update that basket from I Never Kissed a Bear with the overnight breakdown below – Exhibit 4″

For those asking, the basket in question is charted below: it represents what Steele believes are China’s Systematic Risk Entities – aka China’s chronic acquirors profiled here at the end of June – that got a call from the Chinese Bank regulator at the end of June. He then adds “If we had to break down the basket to have the market call out the potential Lehman, we’d say it was (Wicked?) Wanda.”