I recently wrote that global non-financial sector debt has surged to $153 trillion as of 3Q15. Among individual countries, China has witnessed rapid leveraging since the financial crisis of 2008-09. In my view, the debt crisis is still to unfold for China and this article puts into perspective the scale of leveraging in the last few years.

After the financial crisis of 2008-09, China’s manufacturing sector growth declined and the policy response was to flood the financial system with easy money. The gradual transition from production to consumption based economy was however not possible through expansionary monetary policies and excess liquidity manifested itself in the form of bubble in the real estate sector and also in equities.

However, there is little change in terms of policy response to slowdown as China’s total non-financial debt continues to swell. As the chart below shows, China’s non-financial sector debt was $26.0 trillion as of 3Q15 as compared to $4.2 trillion at the beginning of 2007.

An important point to note is that for the first nine months of 2015, China’s non-financial sector debt has swelled by $2.5 trillion. With the economy showing clear signs of renewed slowdown, I expect surge in debt to continue through 2016.

While debt does little for real economic growth, it is certainly setting up China for a big banking crisis in the coming years. I would stay away from China’s financial sector as the worst is yet to come for Chinese banks.