By Business editor Peter Ryan
There are warnings that China could face a financial crisis bigger than the United States or Europe unless it gets its debt under control.
One of China's top auditors has revealed his accounting firm has stopped approving requests from local governments to increase their debt exposures.
Listen to my report from this morning's edition of AM.
Concerns about a potential meltdown come as China's stellar economic growth begins to slow.
It is pretty hard to get an accurate reading on China's total debt levels, much of which is held by local authorities, but estimates are that China's provinces, cities, regions and villages owe a collective $US3 trillion.
All of this stems back to 2008, when the collapse of Lehman Brothers triggered the global financial crisis and China needed to protect its growth and status and, as a result, pumped more than $US500 billion of stimulus into its economy and created a massive credit boom.
Now a senior Chinese auditor who is the head of China's accounting association, Zhang Kew Hoc, has told the Financial Times of London that he has stopped signing off on risky bond sales by local governments.
Michael Pettis, a professor of finance at Peking University, says the ramped up caution shows China's debt party might soon be over.
"The problem is that so much of this investment is going into empty real estate, empty highways, empty airports, unnecessary manufacturing capacity, etc, that we're in the position, and have been for many years, where debt is rising more quickly than the ability to service that debt," he warned.
"So that's the conundrum they face - if you want to bring that problem under control, you have to bring investment down, and if you bring investment down growth rates will slow very, very sharply."
The International Monetary Fund has also been warning about China's debt levels, and investment banks and ratings agencies have been on the front foot after failing to read the initial signs leading up to the GFC.
There is a very big focus on China's real estate sector, which accounts for 13 per cent of the country's GDP.
There has already there has been a sharp decline in values but, unless Chinese authorities intervene to stop a real estate bubble, some economists are quite worried that there could be much more than a correction but a crash that could rival the US one, which of course almost brought down the US economy back in 2008.