China's economic woes will quickly become a global problem in 2012
China's credit bubble has finally popped. The property market is swinging wildly from boom to bust, the cautionary exhibit of a Bric's dream that is at last coming down to earth with a thud.
It is hard to obtain good data in China, but something is wrong when the country's Homelink property website can report that new home prices in Beijing fell 35% in November from the month before. The calibrated soft-landing intended by Chinese authorities has gone badly wrong.
The growth of the M2 money supply slumped to 12.7% in November, the lowest in 10 years. New lending fell 5% on a month-to-month basis.
The central bank has begun to reverse its tightening policy as inflation subsidies, cutting the reserve requirement for lenders for the first time since 2008 to ease liquidity strains.
The question is whether the People's Bank can do any better than the US Federal Reserve or Bank of Japan at deflating a credit bubble.
Chinese stocks are flashing warning signs. The Shanghai index has fallen 30% since May. It is off 60% from its peak in 2008, almost as much in real terms as Wall Street from 1929 to 1933.
"Investors are massively underestimating the risk of a hard-landing in China, and indeed other Brics [Brazil, Russia, India, China]," said Albert Edwards at Societe Generale.
"The BRICs are falling like bricks and the crises are home-blown, caused by their own boom-bust credit cycles.
"Industrial production is already falling in India, and Brazil will soon follow."
He added: "There is so much spare capacity that they will start dumping goods, risking a deflation shock for the rest of the world. It no surprise that China has just imposed tariffs on imports of GM cars. It is likely China will devalue the yuan next year, risking a trade war".
China's $3.2trn (£2.06trn) foreign reserves have been falling despite the trade surplus. Hot money is flowing out of the country. "Our foreign reserves are falling every day," said Li Yang, a former central bank rate-setter.
The reserve loss acts as a form of monetary tightening, exactly the opposite of the effect during the boom. The reserves cannot be tapped to prop up China's internal banking system. To do so would mean repatriating the money - now in US Treasuries and European bonds - pushing up the yuan at the worst moment.
The economy is badly out of kilter. Consumption has fallen from 48% to 36% of GDP since the late 1990s.
Investment has risen to 50% of GDP. This is off the charts, even by the standards of Japan, Korea or Taiwan during their catch-up spurts. Nothing like it has been seen before in modern times.
Fitch Ratings said China is hooked on credit, but deriving ever less punch from each dose. An extra dollar in loans increased GDP by $0.77 in 2007. It is $0.44 in 2011.
"China's economy today requires significantly more financing to achieve the same level of growth as in the past," said China analyst Charlene Chu.
Ms Chu warned that there had been a "massive build-up in leverage" and fears a "fundamental, structural erosion" in the banking system that differs from past downturns.
Investors had thought China was immune to a property crash because mortgage finance is just 19% of GDP.
Wealthy Chinese often buy two, three or more flats with cash to park money because they cannot invest overseas and bank deposit rates have been -3% in real terms this year.
But with price to income levels reaching nosebleed levels of 18 in East coast cities, apartments - often left empty - have themselves become a momentum trade.
Economics professor Patrick Chovanec said China's property downturn began in earnest in August when construction firms reported that unsold inventories had reached $50bn (£32bn). It has now turned into "a spiral of downward expectations".
A fire-sale is under way in coastal cities, with Shanghai developers slashing prices 25% - much to the fury of earlier buyers, who expect refunds. Prices have reportedly dropped 70% in the ghost city of Ordos in Inner Mongolia.
Beijing was able to counter the global crunch in 2008-2009 by unleashing credit, acting as a shock absorber for the whole world. It is doubtful Beijing can pull off this trick a second time.
"If investors go for growth at all costs again they are likely to find that it works even less than before and inflation returns quickly with a vengeance," said Diana Choyleva from Lombard Street Research.
The International Monetary Fund's Zhu Min says loans have doubled to almost 200% of GDP.
This is roughly twice the intensity of credit growth in the five years preceding Japan's Nikkei bubble in the late 1980s or the US housing bubble from 2002 to 2007. Each of these booms saw loan growth of near 50 percentage points of GDP.
The IMF warned that if hit with multiple shocks, "the banking system could be severely impacted".
Mark Williams from Capital Economics said the great hope was that China would use is credit spree after 2008 to buy time, switching from chronic over-investment to consumer-led growth.
In truth, China faces an epic deleveraging hangover, like the rest of us.