Salient to Investors:

William Pesek writes:

The world believes that China’s leaders are masterful stewards of their economy, steering brilliantly around the 2008 financial crisis, with near-double-digit growth. But the Chinese economy is a giant and powerful creature born of unorthodox experiments, and its makers are increasingly losing control.

Over the past decade, China’s economy has grown addicted to excessive credit growth, but People’s Bank of China chief Zhou Xiaochuan can’t cut off the money without banks suffering from withdrawal.

Nobody really knows how healthy China’s giant, state-owned banks are, or how big its shadow-financing system has grown. Stephen Green at Standard Chartered calls China’s credit system a scary big black box.

How can anyone trust that China is growing at a rate of 7.7 percent when crucial variables in its data tabulation are a mystery? Lu Ting at Bank of America says China’s  trade surplus was 1/10 the $61 billion it reported as of mid-May.

The US shadow-banking system helped crash world markets in 2008, so imagine the damage an entire shadow economy could cause if it unravels.

China avoided bursting one bubble in 2008 by creating new ones. Total credit may reach 200 percent of GDP in Q2, 2013 versus 130 percent in 2008.

Zhou’s backing off  tightening and hastily injecting fresh funds to stem the turmoil underscores how limited Zhou’s powers actually are. Zhou is fundamentally helpless and cannot be truly effective unless the Communist Party gets out of the banking business.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.