Nobody rings a bell at the top of the credit supercycle, to misuse an old adage. Except that this time somebody very powerful in China has done exactly that. 

China watchers are still struggling to identify the author of an electrifying article in the People's Daily that declares war on debt and the "fantasy" of perpetual stimulus. 

Written in a imperial tone, it commands China to break its addiction to credit and take its punishment before matters spiral out of control. If that means bankruptcies must run their course, so be it. 

Fifteen years ago such a mystery article would have been an arcane matter, of interest only to Sinologists. Today it is neuralgic for the entire global - and over-globalized - financial system. 

China's debt is approaching $30 trillion. The fresh credit alone created since 2007 is greater than the outstanding liabilities of the US, Japanese, German, and Indian commercial banking systems combined. 

Moody's warned this month that China's state-owned entities (SOEs) have alone racked up debts of 115pc of GDP, and a fifth may require restructuring. The defaults are already spreading up the ladder from local SOE's to the bigger state behemoths, once thought - wrongly - to have a sovereign guarantee.

To put matters in context, leverage rose by roughly 50 percentage points of GDP in Japan before the Nikkei bubble burst in 1990, or in Korea before the East Asia crisis in 1998, or in the US before the subprime debacle. This gauge is an almost mechanical indicator of a future credit crisis. 

As we all know, China is in a class of its own. Debt has risen by 120 to 140 percentage points. The scale of excess industrial capacity - and China's power and life and death over commodity markets - mean that any serious policy pivot by the Communist Party would set off an international earthquake. 

Hence the fevered speculation about this strange article published on May 9 in the house journal of the Politburo. It was no ordinary screed.

The 11,000 character text - citing an "authoritative person" - was given star-billing on the front page. It described leverage as the "original sin" from which all other risks emanate, with debt “growing like a tree in the air”.

It warned of a "systemic financial crisis" and demanded a halt to the "old methods" of reflexive stimulus every time growth falters. "It is neither possible nor necessary to force economic growing by levering up," it said.

It called for root-and-branch reform of the SOE's - the redoubts of vested interests and the patronage machines of party bosses - with an assault on "zombie companies".  Local governments were ordered to abandon their illusions and accept the inevitable slide in tax revenues, and the equally inevitable rise in unemployment.

If China does not bite the bullet now, the costs will be "much higher" in the future. "China’s economic performance will not be U-shaped and definitely not V-shaped. It will be L-shaped," said the text.  We have been warned.

David Fuller's view

Here is a PDF of AE-P's column.

Xi Jinping himself or his right-hand man Liu He.  I do not think Xi Jinping could or even would have written it, although it may have his tacit approval.  It is certainly an informed, candid article and also a serious warning for China’s local governments. 

China is a remarkable country, having developed more rapidly than any other nation in history.  However, it faces an exceptionally difficult transition from a developing, metal bashing and export-led economy to a developed, consumer oriented and technology-led nation.  This transition is well underway but the obvious economic speedbumps include rampant corruption in a rigid communistic political system, now compromised by spiralling debts, not least among China’s state-owned entities (SOEs).

This is a recipe for a hard landing, which Xi Jinping will obviously try to soften, not least in his own interests.  There could easily be further shockwaves extending well beyond China, especially if it devalues.  Commodities are mentioned as vulnerable in the article above, but they have already experienced the worst bear market since at least 1973-4.  Nevertheless, China’s problems can certainly contribute to commodity price volatility, particularly among industrial metals, while simultaneously lifting equally volatile precious metals.  However, downward reactions by industrial commodities and precious metals remain buying opportunities as they are among the few genuine recovery candidates in today’s markets.