China has finally come full circle. Recall that last year as equities surged, Chinese “investors” opened enough brokerage accounts for every man, woman, and child in LA. The slowing of the economy and pending devaluation of the currency led the smart money to short the market, putting significant downward pressure on stocks. The answer to all of this was to of course arrest anyone who was involved in short selling stocks.

In the end, as people slowly learned that making money trading stocks isn’t as easy as they’d once thought, they asked where else can they put their money, perhaps real estate if it wasn’t so expensive. To which we pointed out that sadly, people will never learn.

But there remain some always those who will never learn., such as Helen Lu.

“Where else can I put my money?” said Helen Lu. “Real estate is so expensive and beyond our reach, and there are no other good investment channels.”

Unfortunately, that proved to be an exchange that foreshadowed where we are today. Real estate prices may still be high, but those “investors” managed to find another place to put their money: Peer to Peer Lending.

As we covered a few days ago, in an effort to push people into owning more homes and juice the economy, the government has eased credit conditions and relaxed tax laws. However this alone hasn’t been quite enough to get buyers enough cash to get the deals done. Enter P2P lending, a shadow banking entity which essentially raises funds from the aforementioned investors, and loans them out as short term loans to buyers so they have enough cash for a down payment on their property. As it turns out, this is has been the answer to the question of “where else can I put my money.”

Just like their foray into stocks, Chinese investors are finding out that it isn’t easy to make money in short-term lending either. Defaults are on the rise and China’s subprime lending bubble has burst.