The fever in China’s financial system seems to have broken overnight, bringing relief to global markets -- at least for the moment.

In overnight trading, the Shanghai Composite ended down just 0.2% after falling nearly 6% intraday. Meanwhile, the overnight repurchase rate – a key measure of interbank lending in China– fell 47 basis points to 6% after hitting a record 12.85% on June 20, Bloomberg reports. Global assets rallied in reaction following steep declines in recent days: Major European bourses rose more than 1% Tuesday and U.S. proxies were up 0.5% in recent trading.

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Traders took solace in comments from Ling Tao, a deputy director of the Shanghai branch of the People's Bank of China, who attributed the recent spike in interbank lending rates to “seasonal factors” and said: "We will continue to closely monitor changes in liquidity in the interbank market…and we will step up communication with the market to stabilize expectations and guide market interest rates into a reasonable range."

Tao’s comments may signal the end of the recent scare but by no means indicate that China’s banking system is on the road to recovery, according to Jim Rickards, senior managing director at Tangent Capital and author of Currency Wars.

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“It’s a giant Ponzi scheme,” Rickards says of the wealth management products being marketed by Chinese trust companies. “There’s a lot to be concerned about.”

In a nutshell, the ‘shadow’ banks borrow from China’s state-controlled banks, use the funds to finance construction projects and sell bonds tied to those projects with yields far above bank savings rates.

“The Ponzi scheme is going on with retail investors…they don’t want 1% or 2% in the bank or even less,” Rickards explains. “The quasi banks come along and say ‘we’ll give you 6%-7%-8%.’ They take the money, invest in these assets that are completely non-productive [with] no way to be able to pay off the debt.”

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In true Ponzi scheme fashion, the key here is that the shadow banks use the proceeds from the latest asset sale to pay off investors from prior ventures. “They never sell the assets,” Rickards says. “They sell [new] products and use that money to pay off the old guys.”

China’s leadership is well aware of this problem, he adds, which explains why they’ve recently stood by as the spike in interbank lending rates caused a cash crunch and accompanying market freakout.