This is what me and my colleague, Russell Lamberti, wrote to clients on March 12, 2013 regarding the Chinese business cycle:
The economy now sits with enormous malinvestments in basic infrastructure and real estate. If the monetary environment remains tight, the term structure of interest rates will correct to pre-monetary intervention levels – meaning a big shift higher of particularly short-term rates – and these malinvestments will liquidate, causing major business cycle risks in China that have the potential to become an outright crash.
Two months later, the 7-day interbank repo rate has spiked from below 3% in mid-May to 12% today. That’s the spike we were waiting for and this is about to set in motion a cascade of very negative economic consequences for China and potentially even the global economy.