The sweltering heat in China is a perfect reflection of Beijing’s economic heatwave.

Today’s headlines can be chilling. Example: Asia’s largest economy grew by 0.4% in the April-June quarter from a year ago. It was less than 1% and a world away from the 5.5% target for 2022.

But it is the increasing risk from China’s debt markets that is increasing the interest of investors. Another big heat is being felt by China’s Evergrande Group and other property developers who are facing unrest among landlords.

The problem: many Chinese took out huge mortgages that were never completed. Home buyers refuse to pay or threaten to pay. The bubble has several economists complaining that China is giving off strong Lehman Brothers vibes as growth continues to accelerate.

Minxin Pei, a China expert at Claremont McKenna College says that confidence in the stability of mainland banks has been “severely shaken” by the failure of several small banks in Henan province in April.

Since 2008-2009, when the Lehman crisis disrupted the global financial system, China has taken on more debt to support growth. Most were provided by local governments away from the real seat of power in Beijing. “Many people wonder how long the party will last,” explains Pei.

Diana Choyleva at Business Economics points to another warning sign that things are not going well in the world of business: the many bank protests in the city of Zhengzhou, the capital of Henan province, in recent months in response to account closures.

This push by “investors in the bank to get their money back and to denounce corruption in the government is another manifestation of the problems that Beijing is facing at the moment,” says Choyleva. “In China, where citizens do not have the opportunity to express their views through the ballot box, domestic banks may reflect a decline in confidence in the Xi system.”

Apparently, investors are betting on Japan-like valuations in China that haven’t made money in the last 13-14 years. Time after time, the leaders of the Communist Party managed to drive China away from the rocks. Beijing did this by pushing China’s debt to GDP ratio to 265%.

Small traders who stepped forward to bet on China’s government debt or yuan over the past twelve years closed the deal. Here, consider hedge fund manager Kyle Bass, founder of Hayman Capital in Dallas.

But China’s debt crisis now collides with two major threats, one from abroad and the other from home.

The first is global inflation that is forcing the Federal Reserve to make the most tightening since the early 1990s. The second is President Xi Jinping’s “zero-Covid” policies, which are paying off—and fast.

In China, accounting for gross domestic product below 4% undoubtedly puts the economy in a low position. Not only is the new wave of Covid-19 weighing on China’s outlook, but it is also the dwindling returns that could reduce the effectiveness of China’s new stimulus.

More than a decade of booming and massive infrastructure projects, much of it funded by local governments, have left China with few projects to plan. Over time, economic benefits diminish, increasing costs for many people.

As Mr. Xinquan Chen, an economist at Goldman Sachs says: “Money does not prevent you from spending on construction this year, while the obstacles are mainly with project pipelines and government incentives.”

And there’s Charlene Chu, an economist best known for looking at the challenges of China’s boom when she was with Fitch Ratings. Now with Autonomous Research, Chu has two major concerns about Xi’s economy.

Tomorrow is another round of Evergrande-like instability like growth lines. The People’s Bank of China may try to open the currency gates to prevent contagion. At some point, questions about companies that are too big to fail will look like they are too big to save.

A longer-term problem is how debt is growing in China’s $17 trillion economy. In a recent appearance on the One Decision Podcast, Chu said “we continue to live in an era where the Chinese government is expanding its debt very quickly. And over time, this has a cost.”

Even if China doesn’t collapse soon, Chu says, the debt “will start to hamper economic growth. The more households and businesses with debt, the more every dollar or RMB of income or income from wages is going to pay back the debt. And this won’t destroy assets, it won’t cost new money to it will help growth and business.”

China, Mr. Chu says, “is at a point where debt is growing and I think that’s one of the things that is troubling China’s growth.” He added that “it’s one of the reasons we think we’re entering an area where we’re going to be seeing moderate to mid-single-digit growth in China as the world starts to slow down.

Many short-sellers attest to the Xi government’s ability to subvert cynicism. However, his savings team is still underperforming as Lehman compares to the financial circles.

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