“Reassessing China’s Sovereign Risk: Emerging Global and Domestic Trends Threaten the ‘Chinese Miracle’” (via Global Association of Risk Professionals); Kevin O’Brien (President of Sovereign Advisors) argues that China has bitten off more than it can chew. He makes the case that the amount of non-performing loans (不良贷款) in China’s national banks are vastly understated – largely from unrecorded transfers to other State Owned Enterprises. He further asserts that Moody’s, Fitch, and S&P have artificially inflated China’s credit rating:

… Logically, you might ask how the three primary NRSRO’s have thus far been able to escape and immediate enforcement action for publishing knowingly false, misleading and injurious ratings in the instance of China. The answer is directly related to the fact that, until very recently, the agencies have been exempt from the regulations by the United States Securities and Exchange Commission (SEC) and have operated outside the supervisory jurisdiction of any other regulatory body. The rating agencies claim to be “publishers” whose ratings constitute “editorials,” thus invoking the right to free speech…

Thankfully we haven’t any problems with the ratings agencies yet. None at all… 

He also provides some background on China’s housing bubble; much financed by the national banks (suggesting that even more of these loans could turn sour):

Chinese central bank statistics published at the end of 2005 reported approximately $400 billion in property lending, representing 17% of the country’s GDP. At the same time, however, China’s National Bureau of Statistics warned that unsold residential space across China had risen by nearly 25%.

Further, he lists unfavorable demographics as a key reason to worry about China’s export dependent economy. As labor becomes more scarce, basic production will become more expensive. 

I outlined earlier that I’m not convinced by that opinion; unfortunately there’s no solid empirical way to demonstrate the converse. But the point is sound – stay out of China’s sovereign debt. Yes, obviously that was everyone’s next move after recent events… Thank God I saved you.