The U.S. jobless rate climbed for a third straight month in June to 9.2 percent. Retail sales in Europe, where policy makers are struggling to solve sovereign debt crises in member countries including Greece and Portugal, sank 1.1 percent in May for the biggest decline since April 2010.
In the past, emerging countries' export growth "helped them overcome a lot of bad mistakes in the banking sector," Duncan, the author of "The Corruption of Capitalism," said in a phone interview. Now in China, "they have massive excess capacity, which they financed with credit, and no one to sell the capacity to," Duncan said.
Shanty Towns
China's local governments, which the National Audit Office estimates have 10.7 trillion yuan of debt, are struggling to repay their obligations after the People's Bank of China lifted its main lending rate five times since October 2010. About a third of local government financing vehicles, used to get around laws prohibiting direct borrowing, don't have cash flow to service their debt, according to China's banking regulator.
Yichun City Construction Investment & Development Co., an investment vehicle for the city of about 1.3 million people near China's border with Russia, sold 1.2 billion yuan of bonds in 2009 backed only by a pledge from the local government and possible future land sales.
Money raised from the sale is being used for the destruction of what the prospectus calls "shanty towns." Single-floor traditional wooden homes in the valley are being demolished to make way for thousands of low-income apartments.
Warrior Princess
The company has also financed a new reservoir, an airport terminal and parklands, one featuring faux Corinthian columns topped by winged warrior princesses and bronze sculptures of chariot-riding gods. The Yichun financing vehicle would have lost money every year from 2006 to 2008 except for direct government subsidies.
Fitch cited financing vehicles and property-related lending as primary areas of concern when it said in April it may cut the country's local-currency debt rating. China has the worst grade in Fitch's three-level scale of potential for systemic stress. Sixty percent of countries that received the score had banking crises within a few years, according to a June 21 presentation by the ratings company.
An increase in Chinese banks' bad-debt ratio to 30 percent is "not inconceivable," Andrew Colquhoun, head of Fitch's Asia-Pacific sovereign debt unit, said on an April 13 conference call. Moody's Investors Service estimates nonperforming loans may climb as high as 18 percent in a "stress" case, according to a July 5 statement. China's total bad loan ratio was 1.1 percent at the end of 2010, according to the central bank.