It would appear the great dragon has feet of clay:

ESTIMATES of the growing pile of non-performing loans (NPLs) in China appear to have caught many by surprise, especially because Beijing's efforts to clean up its rickety state-owned banks were thought to have greatly reduced NPLs and the risk of a full-blown financial crisis.

According to Ernst & Young, the accounting firm, bad loans in the Chinese financial system have reached a staggering $US911 billion ($1.18 trillion), including $US225 billion in potential future NPLs in the four largest state-owned banks.

This equals 40 per cent of gross domestic product and China has already spent the equivalent of 25-30 per cent of GDP in previous bank bail-outs.

It would be interesting to find out how many NPLs are carried by, say, British banks, if only for comparison*. Something tells me there are far, far fewer.

The Japanese economy flopped around like a fish in the bottom of a boat for a decade for many of the same reasons. However, Japan's infrastructure was far more robust, and it seems like they're now finally pulling out of it.

Will China do the same thing? Perhaps, but probably not. If such trends continue, expect to see another east Asian meltdown like we saw back in the mid-90s. Should that happen, the oil bubble that's been building for the past two or three years will finally have its prick (as it were), and we'll all be back to 70c per gallon gasoline. If that happens, look out world, because the US economy will come roaring back with Europe and big chunks of Asia right behind it. Mr. Chavez will finally have his day in the village square, while the Gulf states close their eyes and put their foot down, hoping something else moves the wall they're heading for.

Ain't economics grand?

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* You can't really compare most anyone else's banking sector to the US's, because ours is so incredibly de-centralized. Lots of banks, lots of branches, with comparatively little state control means it's quite difficult just to keep track of it all. Hence our own bad-loan S&L scandal of the late 80s.