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By Brett Daniel Shehadey
Special Contributor for In Homeland Security

China’s national economic strategy for a decade was based on force high growth; particularly, growing national infrastructure, construction and real-estate from Western imports. Political pressure transition heavily into domestic industry amidst high-risk loans within a system of rapid top-down export-led economic growth into an import driven and domestic consumption growth and a suspect looming credit bubble.

The combination of slowing construction boom, the building of ghost towns and domestic re-investment and real-estate, is witnessing the Chinese borrowing necessity and their failure to pay off their local corporate loans; all potential indications of a contraction and a slowing economy.

Investors are concerned about a credit crash. The exhaustion of cash-on-hand and forced growth over the past five years, has led the Chinese banking sector to extend over $14 trillion dollars in loans.

What percent are bad? How low is the asset quality?

Both are good questions. The larger question for many is when will the Chinese debt crisis arrive? What will that look like?

Two weeks ago, a mature coal-mining bond failed to repay investors $50 million dollars and panic struck the expert columns. But that is just a scratch on the tip off the iceberg. China Coal Energy Co., the country’s leading coal company, will see profits drop 65 percent, according to forecasts.

Chinese companies have amassed a whopping $12.1 trillion dollars in debt as of last year. Compared to the US, at $12.9 trillion dollars, China is projected to exceed the total US corporate debt this year.

In China, people are frantically gunning for gold. Purchases continue not only to increase global demand but offer a reason for the recent spike in Chinese gold consumption by 41 percent in 2013. And China’s total foreign exchange reserves reached $3.82 trillion dollars.

Because 500 tons of gold imports in China are unaccounted for, the speculation is that Chinese banks are stockpiling the precious metal.

A Chinese credit crisis worry is that the rest of year will see many more failures to pay on the up and coming $875 billion in maturing bonds for 2014 as well.

Liao Qiang, the senior director Standard & Poor’s, wrote: “We believe Chinese banks’ loan quality will deteriorate noticeably in 2014.”

China has naturally been playing down any fears through tighter higher interest rates and regulations of the shadow banking industry, which have made up an increased sources of loans. The shadow banking debt is at $4.8 trillion.

Smaller banks, which are cited as weak links, are being required to store funds in response to a 67 percent debt increase since 2010. Local debt is now about a third of the Chinese GDP, at around $3 trillion dollars. Even good debt can be bad thing, though, if growth slows by some other means.

Also, for the last two years, bad loans have been on the rise. According to the China Banking Regulatory Commission, non-performing loans rose their highest this year since 2008, by about $4.7 billion dollars (setting the total for 2013 at around $97 billion). Moreover, this assumes that such reporting by government agencies can be trusted and experts warn that the real extent of bad loans is much higher than reported. A lack of transparency exacerbates the problem.

China has been preparing for an economic recession with its reserve purchases and foreign acquisitions. Its corruption reforms and many regulatory safe-guards have helped but command economics, corruption and a lack of transparency are tempting fate. Recommended are a floating exchange rate, interest rate and capital account liberalization.

Empirically, the system will rebalance itself over time from a crash. When this happens, two key problems in China will be social unrest and potential political turmoil in light of any major recession. It would also, now more than ever, seem impossible to stave off a severe recession from so much rapid growth and so much extended credit and debt in the open.