Call it the new China Syndrome: Although Asia's biggest economy is slowing down markedly, credit continues to surge. Dead-end projects and dying industries are sucking up an ever-larger portion of new credit, while more productive borrowers are starved for funds.
Nowhere is this more evident than in China's shadow banking sector, the non-bank financiers that have pumped credit into the economy at a spectacular rate. Trust companies - firms that sell investment products to Chinese savers and use the proceeds to make loans or buy other types of assets - have posted the fastest growth.
A Reuters examination of proprietary data shows that as little as half of trust loans issued in 2012 were used to finance current economic activity, such as a new investment project or increased production at an existing factory.
The other half may have been used for refinancing old debt that funded past projects but is no longer contributing to economic growth. The finding offers a possible explanation for the growing disconnect between lending and growth in China. Many analysts have expressed concern that the so-called "credit intensity" of Chinese growth is increasing. Ever more borrowing is required to produce the same amount of economic output. But no one is sure why.
Rising credit intensity is exacerbating the huge buildup of debt in China's financial system since Beijing launched its credit-fueled 4 trillion yuan ($650 billion) stimulus plan in 2008.
Much of that money flowed into infrastructure, real estate, and new manufacturing capacity. Reuters found that local governments, property developers, and industries suffering from surplus capacity together account for about 70 percent of trust loans granted in 2012.
The 1979 movie "China Syndrome" was about a cataclysmic nuclear reactor meltdown. And some see excessive debt as a ticking time bomb that will eventually produce a wave of defaults and an economic meltdown. But the Reuters examination of the trust data points to a different, though equally worrying scenario: slow and debilitating atrophy.
The risk of pervasive debt rollovers is that China could follow the path of Japan in the "Lost Decades", creating a permanent class of "zombie borrowers" who have little hope of