China's Distorted Economy

China Banks Shunned as Investors Eye 2003 Low in Credit Bust

“China’s economy is very distorted, and the banks, as ever, are at the epicenter of the distortions,” Edward Chancellor, who helps oversee about $106 billion as a strategist at Grantham Mayo Van Otterloo & Co. in Boston and warned of a “sucker’s rally” in Chinese stocks three days before the benchmark index peaked in August 2009, said in an interview. “If China runs into problems with the banking system, which I think it will, I cannot see a situation in which foreign investors are the main priority of Beijing.”
The tumble in Chinese bank shares has surprised equity analysts, who have more positive recommendations on the Asian country’s financial stocks than in any of the world’s other 10 biggest markets. It contrasts with a Chinese economy that’s expanding more than five times as fast as Europe and the U.S.

Evidence is building that Chinese property developers and local government financing vehicles, used to get around laws prohibiting direct borrowing, are struggling to repay their obligations as the economy slows. About 85 percent of the government financing vehicles in China’s Liaoning province, on the border with North Korea, had insufficient income last year to cover debt-servicing payments, according to a July speech by the provincial auditor.
Chinese developers face an “increasingly severe” credit outlook, which may force them to cut prices and turn to costlier funding sources as sales weaken, Standard & Poor’s said in a report today after conducting stress tests of the nation’s real estate companies.
Developers are paying as much as 25 percent interest to borrow from private trust companies as banks withdraw credit, said an official at Beijing-based National Trust in May who asked not to be identified because he isn’t authorized to speak to the media.

I'd excerpt the whole thing if I could. Talk about a building drumbeat.