Locals call it 'money worship-ism', a cancer now ironically threatening China's entire banking system and capital markets.

But expectations are high with China joining the World Trade Organisation in 2001, Beijing hosting the 2008 Olympics, and Shanghai Expo 2010. Foreign investment bank analysts speak dreamily at international conferences.

That is why there are more than 30,000 real estate development companies 'frying' land like crazy, of which 3,000 - or 10 per cent of the nation's total - are in Beijing, averaging one real estate company for every 5,000 Beijing residents.

By any nation's economic standards, this formula represents a frightening economic time bomb.

There is a popular saying among Beijing real estate developers. 'Everything will peak by 2006 in expectation of the Olympics. Then it will all bottom out. So better grab a chunk of cash now. Then we can rest and enjoy.'

Another goes: 'As long as you can get the bank involved to give money, the rest is easy. So what if the building is never finished? That's the bank's problem.'

Construction and real estate insiders in Beijing laugh hysterically at a not-so-unrealistic joke about Beijing government project tenders. It involves three bidders.

The first is from Hong Kong, offering US$3 million inclusive. When asked for a breakdown, they reply, 'US$1 million for materials, US$1 million for labour, and US$1 million for profit.'

The second, an American group, offer US$6 million inclusive. The cadres huff 'expensive!' when they are told American materials are more expensive and standards are higher.

The third bid is from the Beijing No1 Construction Company, under the administration of the Beijing Construction Bureau. 'What's your breakdown?'

The cadres are shocked to hear a staggering US$9 million. 'Don't you realise even the American and Hong Kong tenders are cheaper? And you're using local materials and labour. Explain your breakdown at once!'

The Beijing contractors smile, 'Oh that's easy. We will give US$3 million to you, keep US$3 million for us, and give US$3 million to the Hong Kong guys to get the job done.'

Everyone who hears the joke knows it pierces the core truth about Beijing's frenzied pre-Olympics construction boom.

But this is no laughing matter, for the situation is that most of the money being blown on these projects comes from the banks - and ultimately from the pockets of common people who can ill afford to see their life savings so easily squandered.

And they are unlikely to effect change as they either have no idea what is going on, or, if they do, they have no other investment options anyway.

So for the developers, life continues to be a breeze. All they need is a project. Fortunes are most commonly not made from selling or renting units, but from mismanaging budgets.

Their evidence already clutters Beijing's skyline: concrete skeletons collecting exhaust fumes now that their developers have finished their budgets and have moved on to another site, where the procedure will be repeated.

Last year, Beijing recorded 90 million square metres of unsold commercial housing, half of which was actually carried over from the previous year. Within the first quarter of this year, unsold real estate increased by another 9.6 per cent. But the building boom goes on.

Going by the numbers, it's not hard to see why the market is so lucrative.

With the Chinese economy providing one of the few bright spots in the world, investment in the nation's real estate has provided average annual returns of 15 per cent - about three times the global average.

In Beijing, 70 per cent of the profit is made from the process of reselling land and project approvals. Actual building developers usually purchase land exchanged through many hands.

Land costs aside, real estate developers have 'indirect costs' - basically corruption money.

Taiwanese developers in Shanghai revealed that monthly entertainment expenditures average in the hundreds of thousands of renminbi to obtain approvals and clearances.

Perhaps more alarming, however, is the growth in bank lending to real estate projects, which far outpaces GDP growth. In the five years from 1998, China's commercial bank loans to real estate developers totalled US$230 billion, a whopping annual growth of 25.3 per cent.

Developers - now carrying a total capital debt ratio of 76 per cent - have sucked up 17.6 per cent of total loans in the banking system. This might not be so bad were it not for obvious signs of corruption within the system.

An investigation in autumn last year by the central bank revealed that 9.8 per cent of China's commercial bank loan transactions involved 'violations of regulatory practice', while 24 per cent of total funds lent by the banks are technically illegal.

The phrase 'technically illegal' gets to the core of the problem.

This is because many developers do not have legal land titles or have not obtained proper urban planning approval. The State Land and Resources Ministry says that last year alone 81,000 illegal land transactions caused losses to the state of 1.54 billion yuan (HK$1.45 billion). This is clearly a financial crisis in the making.

Beijing's once prestigious Rose Garden villa development serves as an example of the capital's real estate black holes.

After the project bankrupted Hong Kong's L&D Real Estate it was taken over by a Shandong company which in turn mortgaged the whole mess to Beijing Changping County Rural Credit Co-operative, taking farmers' money to finish construction which, coming on a decade later, still has not passed quality-control standards, meaning residents cannot move in.

In short, the credit co-operative will never get back funds lent.

When dotcoms were on the rise in 1998-99 it was amusing to watch China's real estate circles jump in and cheat foreign venture capitalists. To them, the model was the same as mainland real estate. Cheating Hong Kong and Taiwan developers involved the same basic strategy as the venture capitalists: tell a dream story and take foreign money.

After the collapse of dotcoms in 2000, these same individuals shifted back to real estate with visions of Beijing hosting the 2008 Olympics.

Between 2001 and 2003 approximately 2,000 companies were listed on the Shenzhen and Shanghai markets, of which 348 were real estate companies.

In short, fragile real estate teetering on the top of bank NPLs now occupies 28.86 per cent of China's capital market listings.

Out of the top 10 wealthiest Chinese selected by Forbes in 2002, seven were pure real estate tycoons.

Their fortunes came from borrowing bank funds for big dream projects, then using the money for other things. Among these, Chau Ching-ngai's scandal which broke late April threatened to pop Shanghai's real estate bubble, linking China's new-age tycoons and over-extended state owned banks to local government corruption.

The investigation underway however, is unlikely to go anywhere in particular. If followed through to its logical conclusion it could threaten not only pillars of the banking world, but also political careers.

Today about 400 billion yuan in bank funds is grounded in real estate.

Remember, Hong Kong and Singapore pulled through the 1997 Asian financial crisis largely because their banks' capital ratio was 15-20 per cent and NPLs below 3 per cent. Korea, the Philippines and Thailand suffered because their banks capital ratios were between 6-10 per cent and their NPLs 22-25 per cent.

In 1997, Chinese banks' capital ratio was above 15 per cent. Today China does not have a single commercial bank whose capital ratio reaches 8 per cent as fixed under the Basel International Agreement.

China's state-owned banks are now sitting on 2 trillion yuan in NPLs, of which more than half has no chance of being recovered.

If a financial crisis struck China as it did the rest of Asia in 1997, the result would spell unprecedented disaster for the banks, capital markets, and common people's savings.

How will the government react?

I recall one answer from the driver of a Shanghai tycoon. He pointed to new luxury apartment towers driving through the city one evening, explaining how the units were all occupied by 'golden feathered birds in cages' (concubines).

'When the tycoons are away corrupting officials and talking big business,' he explained, 'the birds are bored so they hire little wolf dogs [male prostitutes] to accompany them in play.' The driver laughed, then sighed. 'When real estate one day crashes, the tycoons will run, the golden feathered birds will fly, and the little wolf dogs will go hungry.'

Laurence Brahm is a political economist and lawyer based in Beijing