Move Over Europe, China Banking Crisis Up Next?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- The Europeans took a giant step toward solving the euro crisis by acknowledging its severity and asking for help. A similar response by China to their incipient "banking" woes would be nice, but the Chinese are entrenched in denial.

Then again the situation in China is very different from Europe. The Chinese government has total control over their provinces, they own the banks, they own the nation's "private property," politicians don't have to worry about being re-elected, they manage their exchange rate, investor protections are limited, and protesters know that free speech is not protected.

That doesn't mean there isn't plenty to deny. Unofficial reports on China's economy vary greatly from government sources.

Economic-related news coming from China is a page-turning thriller. Ponzi schemes, zombies, off-balance-sheet reporting, subprime and mafia-style lending; rising inflation, declining asset values, slowing growth -- it's all there. Add in government meddling in market mechanisms and official denials and China sounds like it has the makings of a perfect economic storm.

Much of the mayhem started with China's bid in 2008 to help boost domestic demand and revive the global economy with a $580 billion stimulus. In some ways it worked like a dream. China was responsible for 30% of global growth in 2010, making it the largest contributor and highlighting the influence China has on the world.

In other ways, the stimulus has had a number of less desirable outcomes:

(1) Domestic demand is heading in the wrong direction. In the late 90s, it was 45% of GDP. Last year it was 33%.

(2) Income inequality is on the rise. According to Bain, Chinese dollar millionaires doubled between 2008 and 2011 to 585,000.

(3) Half the stimulus was invested in the stock market and an already red-hot real estate market.

(4) Property prices were up 21% in 2010.

(5) Local governments have gone on a $2 trillion-plus borrowing and spending binge.

(6) Government investment levels of 25% of GDP drove 10% growth in 1980 vs. 50% and 10% today. Third-quarter 2011 growth was 9.1%, the lowest in two years. (7) Money supply (M2) has been increasing at 18.8% a year. This is a 66% rise since November 2008.

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