Expert suggests easy credit curb to avoid crisis

"Once the debt crashes and the bubble bursts, the consequences will be similar - a financial storm," Kothari warns.

Kothari, formerly head of global equity research for Barclay Plc's Global Investors and head of the economics, finance and accounting department at MIT Sloan in Cambridge, Massachusetts, is now in charge of the school's international programs. He came to Beijing recently to launch the global MBA program with its long-time partner, the School of Economics and Management at Tsinghua University.

"If there is too much housing built but not enough people to occupy it, there will be problems," he says. "This is not the situation yet in big cities, in Beijing, Shanghai or Guangzhou, but in many other places, the risk already exists."

He warns the government not to provide easy credit, either to home-buyers or real estate developers.

"The government tries to stimulate the economy by issuing more debts - basically, it is like printing money," he says. "(In the US) after 2001, the government made it very easy for people to buy homes and it pushed up the prices. But once the prices dropped, a lot of people previously involved in construction lost their jobs, so people unable to pay back the loans began to default."

China's National Audit Office estimates that local debt will total 15 trillion yuan ($2.45 trillion) to 18 trillion yuan in 2013. Some international organizations estimate it will be much larger.

Issuing debt is helpful if there is a short-term liquidity problem, "but politicians use this method too much", Kothari says.