Homegrown credit risks look to come back home to roost. I am actually shocked the following development didn't get more traction in the mainstream media. The recent announcement by the Chinese finance ministry to nullify all guarantees for local governments for loans taken by their financing vehicles, and its plan to issue rules banning all future guarantees by local governments (see Bloomberg article), fuels (even further) our concerns about credit risks on such loans.

The primary concern is that most of these were non-recourse loans to provinces, municipalities and counties through shell companies, known as Urban Development Investment Corporations (UDIC). Some went to fund projects backed by assets, such as commercial real estate, others to projects with future cash flows such as subways and toll roads. Still others are social in nature and backed only by an implicit guarantee of the City/Provincial Investment Holding Corporation (CIHC).

Stories of rapidly inflating property prices, loose credit and off-plan speculation sound only too familiar to veterans of the Dubai real estate crash, and yet this is what we hear from Shanghai these days. How long before the Chinese property bubble bursts?

Of course, it is wrong to compare a wealthy, advanced economy like Dubai with an emerging market economy like China with very low salary levels. And yet this also highlights the severity of the problem in Chinese real estate right now.

Shanghai property is presently 50 percent more expensive than in Dubai, and yet per capita income in Dubai is up alongside American levels, and higher for most property buyers who still mainly pay in cash and not debt.

There is no doubt that China is becoming an economic powerhouse. The Asian nation’s ETFs are abundant with opportunities, and one of the most notable ones could be in its real estate sector, which one study found was undervalued.

Comparing price-to-book ratios to return on equity, the Chinese real estate market was the most undervalued when compared to other high-growth nations like India and Hong Kong, comments Kevin Grewal for TheStreet. Some expert analysts estimate that the Chinese real estate sector has underperformed the benchmark MSCI China index by almost 30%