Barron's will join in the China alert this weekend. More warnings on the Chinese "bubble economy"

According to The Economist magazine, China's banks have been little more than conduits for pouring money into local governments and state-owned companies, with little regard for risk or profit. The build-up of non-performing loans have led to insolvency of virtually the entire banking system. By end-2003, outstanding loans had surged to 145% of GDP, the highest such ratio in the world. Bad debts to banks at 40% of GDP are a threat to fiscal stability. Most Chinese bankers, particularly in local branches, cannot tell a good loan from a bad one. There is no need to, because local managers' pay has depended on asset growth. ­Lending lots and attracting deposits quickly have been all that counted - risk, return and capital adequacy have meant nothing.

The magazine [The Economist] also notes that local governments have illegally underwritten $100 billion in loans to bankroll favored investment projects. And though the Chinese are making strides and moving as fast as they can on reform, this system will take years to fix.

The discussion of excess liquidity (too much cash) in the system caused by our 1% interest rates imposed by our Fed is always a part. Our low rates meant that our money was seeking a better return and went into China to cash in on the "miracle" supposedly taking place in that rigidly planned economy. The money was entirely speculative and the Chinese planners were available for cash bribes. The result is that real estate prices have gone through the roof and these real property prices have counted in the GDP numbers in China. Take out the real estate bubble and you have a much different picture of China. In addition

There are an estimated 150 million surplus workers in the rural sector.
There are 10-12 million surplus workers in the state-owned enterprises.
11- 12 million people are added annually to the working-age population.

"Some 800 million rural Chinese make 15% of what their counterparts in the cities earn," according to Naim. That is staggering inequality. "Because the inequality is so staggering ­and access to services and infrastructure so uneven between rural and urban areas, and unemployment so unevenly distributed, the burden to argue that China will not have some growth-impairing accident is very hard."

They will have a "hard landing", but after that things look rosy indeed because the thinking is that the Chinese will not allow their banks to "carry" non performing loans for years and years as the Japanese did. Stay tuned, and meanwhile watch any stocks that have anything to do with commodities; those prices are about to fall hard around the world. Be sure you check out Barron's this week for a major article by Stratfor's Friedman:

"’Today's China boom can only be compared to the dot-com frenzy of the late '90s in the hype and conviction that China will somehow defy all the rules of normal economic cycles,’ he [Mr. Friedman] avers. Yet many observers are still agog over China's low labor costs, the gleaming office buildings of Shanghai, the state-of-the art plants rimming its eastern cities, huge currency reserves and surging trade surpluses.

“Friedman sees growing imbalances, seething social discontent and a rotting financial structure. In fact, to Friedman, the current China exhibits unsettling similarities to Japan in the late '80s, just before the sun set on the latter economy.

“China, like Japan of yore, is experiencing an insensate real-estate boom and looming overcapacity in its industrial base.

“The financial structures of both countries suffer from the rot of loan misallocation, a shaky banking system and a huge overhang of bad debts, Friedman notes. Likewise, much of today's economic growth in China is profitless, due to both the weight of moribund state-owned enterprises in the economy and a mania for market-share growth at the expense of economic returns.”

Returns? We communists don't need no stinking returns. Barron's is MSM and this news has been so far off the radar that I think I'm the only one who has commented on it during the past year.