It was in late 2009 that the Chinese economy seemed to be going back to ‘business as usual’ – a return to 9% – 10% growth was being predicted.

Demand for commodities such as steel, cement and aluminum would escalate and plants could return to the normally high levels of output.

Well, that was then, and this is now. It turns out that for China the financial crisis is not over after all. Its economy is overheating and inventories are bigger than ever. The air is leaking out of the bubbles in the property and equity markets.

Central government stimulus of the economy has created a glut of commodities unfettered by normal demand constraints. Government officials have now publicly stated that this is a situation of “severe overcapacity due to reduced local and global demand.”

And it’s not just the core commodities like steel and cement that are affected. Glass, aluminum, copper and solar cells have all seen massive stockpiles developing.

China has prior experience of the impact of misguided incentives. China found that, while having achieved dominance in world markets for Vitamin C in 2007, it had inadvertently developed the capacity to produce 150% of the world’s Vitamin C demand. Plant closures and layoffs resulted.

Two industries, manufacturing and construction, constitute more than half of China’s GDP and up to 60% of non-farm jobs.

While a centrally-run economy can keep all the balls in the air for a while with creative monetary policy, it’s now the ‘illegitimate projects’ that have created the headache for the Chinese economy.

Incentives that have trickled down from central to local governments have resulted in loss-making enterprises supported by networks of local party officials, distributed almost unseen throughout small cities in China.

Pressure on the Chinese currency, the Yuan, continues unabated. The implications of any change in government policy at this stage could be profound, both inside and outside China.

Already the worry of vast amounts of speculative, and highly mobile, capital seems to be creating a ‘perfect storm’ that could be a bifurcation point for economic thinking.