By John Richardson
IS China facing a bad debt crisis as serious, or perhaps even worse, than sub-prime in the US and sovereign debt in Europe?
Despite all the bland reassurances the blog keeps hearing from chemical industry executives about the tremendous growth prospects in China, this is a valid question as we try to assess the prospects for 2012 and beyond.
We are not saying, as we discussed last month, that the opportunities are not indeed tremendous in China and other emerging markets.
It is just that we continue to feel that the level of debate, in public at least, doesn't take into account the big risks China faces as it confronts its bad-debt crisis.
As we discussed yesterday, economic policy is likely to be conservative in 2012 as a leadership transition takes.
But the longer the politicians dither, the bigger the debt problem could become - as has been the case in Europe.
Ratings agency Fitch is concerned that 30% of China's loans could turn bad, we wrote in November.
"It means that $2.5 trillion of loans might not be paid, and yet 2010 GDP was only $5.9 trillion," we were told by our fellow blogger, Paul Hodges.
"Even if we halve Fitch's estimate, this would still mean loans worth 21% of GDP would not be repaid. This is a big haircut even by eurozone standards."
More recent analysis by Bloomberg tallied the debt disclosed by 231 local government financing companies that had sold bonds, notes or commercial last year - up until 10 December. The total outstanding was $622bn, more than the size of the current European bailout fund.
The article suggests that, despite official central government data to the contrary, China is failing to curb borrowing as local governments panic and borrow more money.
They are caught in a vicious circle of needing to borrow more to generate cash flow in order to meet obligations on existing borrowings.
This cash flow is being generated from completion of property projects, but real estate prices are falling in response to the central government's deliberate policy of driving-down property prices.
A handful of property developers in Beijing reduced prices by 20 percent in mid-December, according to this report from Reuters. And even the government-controlled Xinhua news agency is reporting that overall property prices in Beijing will fall by 10-20 per cent over the next six to 12 months.
The central government will have to eventually step in to take bad debts off the books of the state-owned banks that have leant money to the local authorities.
But, as we said, the longer that Beijing waits as the new generation of leaders settles in, the bigger the problem.
What also needs to happen is for the central government to address the heart of the issue: The dependence of local authorities on land sales to raise revenue.
Exactly how do you go about dismantling, and then rebuilding, an economic system?
Firstly, you would face the need to fill the revenue shortfall confronting local authorities no longer able to depend on land sales. Land sales typically account for 40 percent of the money raised by provincial and city authorities.
And secondly, local government officials are likely to resist change as land deals have been a tremendous source of additional income through corrupt payments.
The new generation of leaders need to find a solution not only because of the danger that the bad-debt crisis could get much worse.
One of the causes of rising social unrest is the seizure of agricultural land for commercial development, as illustrated by what happened in Wukan.