Charlene Chu, a banking analyst who made her name warning of the risks from China’s credit binge, said a bailout in the trillions of dollars is needed to tackle the bad-debt burden dragging down the nation’s economy.

Speaking eight days after a Communist Party newspaper highlighted dangers from the build-up of debt, Chu, a partner at Autonomous Research, said she was yet to be convinced the government is serious about deleveraging and eliminating industry overcapacity.

She also argued that lenders’ off-balance-sheet portfolios of wealth-management products are the biggest immediate threat to the nation’s financial system, with similarities to Western bank exposures in 2008 that helped to trigger a global meltdown.

The former Fitch Ratings analyst uses a top-down approach to calculating China’s bad-debt levels as the credit to gross domestic product ratio worsens, requiring more credit to generate each unit of GDP.

While Chu is on the bearish side of the debate about the outlook for China, she’s not alone. In a report on Monday, Societe Generale SA analysts said that Chinese banks may ultimately face 8 trillion yuan ($1.2 trillion) in losses and a bailout from the government, citing the scale of soured credit within state-owned enterprises.

Interviewed in Hong Kong last week, Chu estimated as much as 22 percent of all China’s outstanding credit may be nonperforming by the end of this year, compared with an official bad-loan number for banks in March of 1.75 percent.

David Fuller's view

Anyone interested in China will want to read the Q & A interview with Charlene Chu, which comprises about two thirds of this article.  Her views are certainly credible and other China specialists have expressed similar views in recent years.  A relevant question is: can China grow its way out of this problem without widespread disruption?

Theoretically, yes it can, as the central government, plus regional governments and Chinese government-controlled banks are presumably holding most of China’s debt.  However, we should obviously keep an eye on China’s stock market which has been underperforming for some time.  Additionally, we should pay close attention to the Chinese Yuan, shown here against the US Dollar – USD/CNY.  The Dollar has been appreciating against the Yuan Renminbi since 2014, albeit from a low level for the US currency, and a surge above ¥6.6 would be evidenced of further capital flight and devaluation.  Another approximately similar sized move to ¥6.8 might not be too much of a problem, but clear evidence of further weakness would be destabilising, particularly within the Asian region.