The consensus on Wall Street is that looking at China's GDP in order to understand its growth rate doesn't work.That's because investors have noticed that no matter what happens, the government's projections on the first day of the year always seem to come true.Exports can tank (as they did in July), the property market can slow (as it has all year), manufacturing output can look dismal (also a recent theme), but no matter whatthe government insists the country is still growing at 7% GDP.So what do China investors look at to figure out how the country is doing'Jim Chanos, founder of short hedge fund Kynikos Associates, has been bearish on China for years. At a China Institute discussion in New York City, he explained what he looks at while he's investing."China is still a debt driven, some say addicted society," he told the crowd.In other words, Chanos believes this is a story about an explosion incredit.So he and his associates look at China's banking system for direction. They look at loan growth, capital adequacy, and credit expansion and/or contraction.By his estimation, in 2001 China's GDP was roughly $1 trillion. Bank loans were also $1 trillion, with $400 million of those loans non-performing.Now China is an $11 trillion economy with $30 trillion in loans with 1%-2% of those loans non-performing, he said. Dangerous stuff.Loan growth is continuing, evenduring this time of economic duress. The percentage of non-performing loans has been growing as a result.If you are looking at what he is looking at, it is ugly.Track itBack in 2011, China came up with a data point to wrap up a lot of what Chanos looks at. It's called total social financing(TSF). The measure is supposed to calculate all the fundraising going on all over the country, including banks and corporations.China's central bank describes it as "a money-added concept, indicating total fundsthe real economy obtained from the financial system over acertain period of time."Chanos describes it as "the most under-appreciated number in global finance."It includes Chinese bank loans in yuan, foreign currency loans, bank acceptance bills, corporate bonds and non-financial institution equity sales. Basically it's the debt everyone is racking up including, ideally, what's going on in the world of shadow banking.Here's what that looks like:In June and July total social financing expanded faster than Wall Street analysts expected. Part of that was due to the government going to the rescue of the stock market. New loans surged, almost hitting the level they were at when China flooded the economy with cash during the 2009 financial crisis.In August new loan issuance slowed as the stock market rescue came to an end, but TSF still grew to1.08 trillion yuan ($169 billion) for the month from 718.8 billion yuan in July.Depending how you look at it this is good (because it keeps money flowing through the economy during a slow down) or bad (because it's adding debt to the economy during a slow down).Take your pick.How this gets uglyChina's 'New Normal' plan to move the economy from one based on investment to one based on domestic consumption has not been going as planned. The economy is slowing down faster than anyone expected.Part of that is because of debt. State-owned enterprises are so busy paying it back and keeping people employed that they're not focusing on productivity. This is how you get zombie companies.So part of the 'New Normal' plan is to restructure these companies, but the government didn't want to do that through loans since there was already so much debt on the books. That's why it encouraged Chinese people to get into the stock marketso companies could be capitalized during their transition.Of course, that didn't work. The stock market crashed in June and August.So China's going to have to find another way. One that likely means more debt issuance and more easing to keep money flowing through the economy. We've already seen some of that, as the PBOC has cut rates four times this year already.The question is, though, whether these loans will be productive. An economic slow down doesn't helpit means people will have trouble paying back loans. Banks are already starting to feel that.Plus, as Societe Generale analyst Wei Yao points out, Augusts' TSF data doesn't really give you the whole picture of how much debt is being taken on, because it didn't include a bond swap with local governments to the tune of 415 billion yuan (around $65 billion).That swap still didn't spur productive economic growth. August was an ugly month for data across the board."The unpleasant implication is that even the most effective growth stabilizer of loan-backed infrastructure stimulus has not yet gained enough traction. The only solution is to do more infrastructure investment, which we expect," said Yao in a recent note.Theseinfrastructure projects could beproductive. China has a history of building things it doesn't need however."They'll put a smoke belching factory in the middle of a city," said Goldman Sachs CEO Lloyd Blankfein in an interview last week. "In China, when they want to pump up their economy ... they build 82 airports."Of course, he added, 30 of those airports would be in the wrong place.And that means the country is just adding to its massive pile of debt with loans that may never be paid back.Join the conversation about this storyNOW WATCH: Everything collapsed at a government-funded construction site in China ' a worker captured it on camera
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