In reality, China’s residential property bubbles are obvious. But the real danger lies elsewhere. So-called “loan platforms” established by local governments pose a much more serious risk. In the 1990s, China centralized its tax system and rendered local governments dependent on Beijing’s coffers. In order to make up the budget shortfall, local governments established these funding vehicles through which they can obtain commercial loans. In 2008, when Beijing mobilized a massive Â¥4 trillion pump priming, it ordered local governments to bear one-third the cost themselves. This triggered a stampede. As of the end of June this year, there are 8,221 platforms and their outstanding loan balance is Â¥7.7 trillion, of which 20 percent to 25 percent are deemed “problematic” by the China Banking Regulatory Commission.
That is from The International Economy, Fall 2010, from a senior and anonymous Japanese official, not on-line. Bernard Connolly discusses a related scenario and considers whether such defaults might lead to a depreciation (!) of the yuan. You should consider the claims speculative, though I do not think you should dismiss them.
For the pointer I thank Steve Hanke.