Yesterday HSBC released its "flash" purchasing managers index for Chinese manufacturers in April.
That sounds arcane, I know, but the news was bad. The index, which is widely recognised as one of the better leading indicators of Chinese economic activity, slipped back this month, when most analysts had been expecting it to rise.
Coming on top of news that China's economic growth in the first three months of the year was weaker than expected, the soft PMI number was especially discouraging.
That's because economists had been looking for a pick-up in activity to reflect the record 10 trillion yuan (HK$12.4 trillion) of new funding extended by China's financial system over the last six months (see chart).
Normally you would expect some time lag between an increase in credit creation and a resulting acceleration in economic growth. It generally takes a few months as companies borrow and invest, and for the benefits to show up in increased consumption by their workers.
But this time around either the time lag is longer than usual, or the response is proving unusually sluggish.
The Ministry of Industry and Information Technology offered a partial explanation yesterday for this disappointing pass-through from increased lending to business activity.
In a statement, the ministry grumbled that Chinese companies are suffering from overcapacity, which has eroded their enthusiasm for making new investments.
Industrial overcapacity is hardly surprising. Over 2009 and 2010 Beijing ordered China's banks to open their credit taps to cushion the impact of the global financial crisis.
In 2009 alone, new bank lending jumped to a third of Chinese gross domestic product. On the receiving end of near-limitless funds at interest rates barely higher than the rate of inflation, industrial companies leveraged up and invested in all the new factories and plant they could desire.
Generating profits from those facilities has proved tough, however. A shortage of skilled workers has pushed up labour costs, while depressed demand in the developed world coupled with a strong yuan has eaten into sales growth among exporters.
As a result, profitability has suffered and, as the ministry complained yesterday, companies have scaled back their plans for future investment. Still, if corporations aren't borrowing to invest in new productive capacity, all that credit being created by the financial system must be going somewhere.
Clearly a lot of it is being channelled into local government-run infrastructure projects as officials step up the rate at which they are building roads, bridges, metro-rail systems and the like.
Some of these are wasteful vanity projects. Others will generate big benefits for local economies. But infrastructure investment is a slow business, so even the worthwhile projects won't begin to pay dividends in the shape of sustainably higher economic growth rates for a considerable time to come.
In addition, much of the new credit is being funnelled into China's property market. According to official data, the value of buildings sold in the first three months of the year shot up by 60 per cent compared with the first quarter of last year.
That might be good news for property investors. But credit pumped into the property market makes little direct contribution to growth. For example, although China's statisticians include land sales when they calculate total fixed asset investment, in reality land transfers do not add to China's stock of capital, and by themselves contribute nothing to output growth.
In short, although China's credit engine is revving furiously, the transmission mechanism has been knocked out of gear. As a result, the economy's growth speed is falling.
In the short term, none of this matters too much. But if the financial system continues to create credit without generating growth, a lot of the assets purchased will fail to generate enough cashflow to cover their debt service costs.
Loans will turn bad, unless China's banks turn a blind eye and agree to roll them over, and bond-holders will be threatened with a surge in defaults.
Ultimately Beijing will bail out the financial system to preserve social stability. But the process will set back economic liberalisation by years and costs will weigh grievously on China's future growth prospects.