China: credit crunch or worse?
What is the significance of the recent turmoil in China's money markets, the sharp reduction in the flow of credit between banks and the rising cost of loans between banks?
Its trigger has been a tightening of credit provision to the financial system by the Chinese central bank, the People's Bank of China.
But its more fundamental cause is the perception - apparently shared by the central bank - that Chinese banks and so-called shadow banks have lent far too much, too recklessly over the past five years, and that a reckoning may loom.
There are two implications.
First that the Chinese authorities have lost one of their most important economic levers, which they have deployed with powerful effect since the 2008 global financial crisis - namely to create vast amounts of credit to fund investment, and stimulate economic growth to offset deflationary forces imported from the rest of the world.
Or to put it another way, the widespread recognition that excessive amounts of debt have been accumulated by speculators, property developers and local governments, inter alia, makes it much riskier for the central bank to continue the recent policy of stoking up an investment boom each time there is a blip in China's growth.
To do so in future would risk China becoming dangerously like Japan in the late 1980s - an economy in which a massive investment bubble deflates to stymie growth for a generation.
So with China's credit-creation lever not what it was, the continued ability of the world's second biggest economy to be the engine of global growth - whatever is happening in the rest of the world - is also not what it was.
That doesn't just matter for Chinese people, habituated to the kind of rapid expansion of GDP and rising incomes that we haven't enjoyed since the 19th Century.
It also matters to us, in the rich West, who are not yet out of the economic recovery room - even if America's central bank, the Federal Reserve, believes US economic conditions may have improved sufficiently by the middle of next year for it to think about switching off its unprecedented money creation.
To put it another way, what's currently worrying global investors isn't just that the Fed seems poised to stop manufacturing all that almost-free money (see my earlier blog), it is that this could happen at a time when what's happening in China may reinforce a global squeeze rather than counteracting it.
Tumbling share, bond and commodity prices aren't all the Fed's fault, on that view, but are also a manifestation of China nerves.
There is of course a second and much more disturbing possible implication of spiking lending rates in China - which is that the slowdown in credit creation will lead to tumbling asset prices, widespread bankruptcies and the crippling of the banking and wider financial system.
That has been a potential risk for some years, as China embarked on its bold economic experiment of fuelling growth with levels of investment almost beyond comprehension.
Investment in China has been equivalent to around half of GDP, more than three times what it is in Britain (a not very relevant comparator), and about 50% greater than it was in Japan just before that economy went pop almost a quarter of a century ago.
Of course the modernisation of China requires the roads, and railway lines, and airports and gleaming towers and shopping malls and homes that have been built.
But it might not have needed them quite so quickly, if - as seems to be the case - some of them have been built shoddily and some of the developers and owners are going to struggle to keep up the financing payments on them.
In other words. it is the financial corollary of the investment boom that seems most troubling right now.
According to a recent and influential report by Fitch, outstanding loans by Chinese banks and shadow financial institutions were equivalent to 200% of GDP at the end of 2012, up from around 125% of GDP in 2008.
As quantum, domestic business and household debt at two times GDP is high - pretty similar, for example, to a debt burden on the UK private sector which has hobbled our economy.
But it is the stunning and unsustainably rapid rate of growth in Chinese credit creation, and who has borrowed the money, that are the main sources of concern.
Unless China is re-writing financial history, much of that money will have been lent without due care to businesses and individuals, and many of them will never be able to repay much of it.
As and when that is too conspicuous to ignore, banks and financial institutions will go bust - unless bailed out by central bank and government.
Maybe the Chinese exception will continue, but the lesson of 500 years of capitalism would suggest otherwise.