For more than a decade, I have been concerned about the potential for a real estate– and debt-driven crisis in China and its potential impact on global financial markets. To date, my concerns have not been realised, but the fundamental economic principles causing my concern have grown exponentially.

In the past, analysts and pundits, such as myself, have periodically compared the Chinese economy to the US savings and loan crisis, Japan’s bubble economy, the Asian financial crisis and, most recently, the global financial crisis. All of these events were fostered by the same underlying fundamental economic problems — massive growth in debt markets (government, corporate and household debt); real estate appreciation and speculation; weak and/or lax bank and securities regulations; poor transparency; and an unfounded belief the government would prevent a systemic failure within the banking system.

The search for systemic risk

Chinese governmen