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A Bear in the China Story: Opinion

Stocks in this article: YUM CAT

NEW YORK ( TheStreet) -- The China bulls haven't given up in spite of all the evidence that China's economy is in trouble. Only massive governmental projects are keeping economic activity from contracting. Capital investments from the government are now about five times greater than in developed countries.

That obviously leads to lots of "mal-investment," waste and corruption.

The large, government-controlled enterprises get the benefit of these projects. Their top management is usually from the families of the top party officials. They are able to siphon off hundreds of millions of dollars from the top. They not only control these large firms but also the powerful, official party organizations. It's blatant incest, typical of all communistic regimes.

The current prime minister has a well-publicized "anti-corruption" agenda. Is it show or real? It's curious that at the same time the government has passed a law that any articles or blogs critical of the government or insinuating corruption at local and central levels of governments or fraud at corporations is punishable with prison. Investigative reporters are usually the ones who have exposed such misdeeds. How can this law be part of an "anti-corruption" agenda?

In 2011 the People's Bank of China issued a report that said 18,000 public officials had stolen assets of around $100 billion from 1995 to 2008 and fled the country. I wonder what the "unofficial" number is?

Let's look at the economy.

The debt in the economy has soared over the past six years to astronomical levels. During that time, banking sector assets (i.e. loans) have grown by about $14 trillion according to Fitch credit rating service. That's equivalent to the size of the entire U.S. banking system.

Some private estimates are that perhaps 40% to 50% of these loans are "non-accruing" -- in other words, basically in default.

This happened in the late 1990s, and the government restructured the banking system by forming "bad banks" that took over the bad loans from the banks. Then the government sold shares in the bad banks to investment vehicles, some those of the government's including foreign investment firms. That's how that problem was resolved. It could be done again.

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