NEW YORK ( TheStreet) -- China has the largest credit bubble in the world.We have tracked the private sector credit in China for the past several years. It's a parabolic curve, and as market observers know, parabolic moves eventually collapse. My e-book, "The Coming China Crisis" (150 pages), one year ago predicted a crisis. It was greeted with great disbelief, similar to our book written in 2007, "Prelude to Meltdown," which predicted that 2008 would see a potential meltdown in the U.S. system. Very few people believed it and the financial media ignored it. But now it has surfaced.
According to Fitch Ratings, total credit in China has grown from $9 trillion in 2008 to $23 trillion. That's bigger than the entire U.S. banking system. The "shadow banking system," which is largely unregulated and partially illegal, is over $10 trillion. That's enormous. The China credit markets are virtually shut down. Small to mid-sized firms are unable to get credit anywhere. Credit is the lifeblood of the economy, which is the basis for the "Theory of Liquidity & Credit" that we developed in the 1970s. According to our theory, when credit tightens like this, a recession, or worse, is inevitable. In 1990, this allowed us to predict the bursting of the Japanese bubble. Now, we see the same happening in China. Chinese companies have tremendous corporate debt burdens, requiring them to pay US$1 trillion in interest this year. Much of current liquidity is being used to repay debt rather than finance output.