A man walking past an uprooted tree after Typhoon Vicente hit Hong Kong in 2012. Reuters

There are China analysts, and then there is Charlene Chu.

She has been called a rock star of Chinese-debt analysis. Money managers the world over pay tens of thousands of dollars for access to her research at her new firm Autonomous Research. Her reports are rarely leaked, and she rarely gives interviews.

Business Insider got a glimpse at a massive report she wrote at the end of July.

This was when everyone was freaking out about the precipitous fall of China's stock markets, and it predates the Chinese authorities' decision to devalue the yuan.

Her base case in the report was for Chinese authorities to maintain stability of the equity market and forestall contagion.

There is also a doomsday scenario, however, in which there is contagion to other domestic and international markets, large capital outflows, and an acceleration of problems associated with financial-sector weakness and corporate indebtedness.

The report said: "This in turn would likely lead to a significant pullback in credit, putting the brakes on GDP growth and bringing an end to China's decades of stellar economic growth. At that point, social and political stability — the critical wild cards in this equation — could come under question."

This is what doom looks like

Chu's thesis goes against an idea we've been hearing over and over since Chinese stocks started crashing: that the stock market is not at all connected to China's real economy.

The connection is in corporate working capital loans that banks lent out that, she posits, may have been invested in the stock market. Now that the stock market is crashing, those loans are under intense pressure. That, in turn, puts major pressure on the banks and zaps liquidity.

As the picture darkens, investors will start to take their money out of China — capital flight.

The Shanghai Composite, finally not falling like a knife. Yahoo Finance

Capital has already been leaving China at a rapid rate for months, but investors haven't been panicking because they believe the Chinese government has as much as $3.7 trillion in foreign-exchange reserves to shore up the system. Chu's report challenges that notion, noting that as much as $900 billion of that pile is tied up in illiquid investments.

There are also some eye-popping statistics on the level of unrecognized losses in the financial sector and leverage in the corporate sector.

This idea that China isn't investing in a way that will grow its economy in a new direction has been out in the ether for years, but the numbers here are staggering. The report estimates that there is 40% more credit in the economy than is required, and as a result the return on that credit — or the amount of gross domestic product generated by an additional yuan in the economy — has slumped.

In short, Chinese companies are pursuing uneconomic projects.

You can bet some of these are in the property sector, a sector the government has now decided to throw more investment money at to keep the economy going.

That is important because if the returns from a project aren't sufficient to cover the interest payments, then losses will surely follow.

The report said: "A large increase in credit that isn't matched by a similar rise in GDP/income is likely generating insufficient returns that one day will turn into losses."

And it is the banks that bear those losses.

Banks have historically incurred losses close to half of their share of the excess credit in countries that have undergone a boom and bust, according to the research. That would put losses in the range of $4 trillion to $8 trillion, depending on how it unfolds in China and whether the losses continue to build until 2018.

Chinese President Xi Jinping at a meeting at the Great Hall of the People in Beijing in 2013. Reuters/Jason Lee

No path to growth ... right now

Last week the Chinese government weakened its currency in response to dismal export numbers and (probably) troubling employment figures.

Chu's entire scenario is made worse by the weakened yuan. Why? Because it adds billions more in debt to China's corporate balance sheets. Bloomberg estimated that number to be about $10 billion right after the yuan was allowed to slide 1.9%.

The only solution available to China is the reform of what Chu describes as "a broken growth model." The Chinese authorities have made the right noises on this point, but progress has been slow thus far.

Policymakers have often backed down when reform is seen as challenging, and directives announced by senior politicians often look very different in the field.

The note said: "Reform is relatively effortless when GDP growth is in the teens; it is much more complex and painful in a climate in which GDP growth is rapidly slowing.

"For this reason, we see a risk that Chinese policymakers won't be able to stomach the pain of some reforms and will simply back away — the same way they recently walked away from their pledge last fall to cut off new local government borrowing."

That would mean the Chinese authorities putting off the hard decisions in the hope that they can maintain stability and ultimately grow their way out of the difficulties they currently face. Every time they do that they increase the likelihood that the blowup will be more devastating if and when it comes.

The report said: "The problem is the challenges facing the Chinese authorities are growing rapidly and becoming more intractable each year."