The Chinese economy could be in far worse shape than many of us suspect. Bloomberg reported that the amount of unpaid accounts payable in the People’s Republic is now $590 billion.

That figure exceeds the entire economic output of Taiwan and it grew by 23% in 2015, according to Bloomberg. To make matter worse, it now takes the average Chinese company 83 days to collect payment for its invoices.

The length of time it takes Chinese firms to pay has been increasing from 55 days in 2010 to 79 days in 2014, data collected by Bloomberg indicates. The average company in the world’s major economy takes 44 days to pay its bills. Chinese industrial companies take 131 days to pay, while technology companies take 120 days to pay.

Accounts Payable Crisis to Debt Crisis

This failure to pay could be the reason why the number of corporate bankruptcies in China is expected to increase by 20% this year. Nor is this trend necessarily new, the number of corporate insolvencies in China increased by 25% in 2015. The situation has given the People’s Republic a dubious honor: it now has the most bankruptcies in the world’s top 43 economies.

Many Chinese companies are so desperate that they are relying on credit and bank loans to cover their operating expenses. They are playing a desperate game in which they hope the unpaid invoices will get paid before the note comes due.

To make matters worse, corporate debt has now reached record levels in China, largely because of firms extending credit to customers. Much of that debt is in the form of subprime dark loans extended to companies by Chinese banks. This makes the banking system in the People’s Republic vulnerable to a meltdown similar to that which struck the U.S. mortgage industry in 2007.

“Lending as a share of GDP, especially corporate lending as a share of GDP, is too high,” People’s Bank of China Governor Zhou Xiaochuan admitted to the press on March 20, 2016. Zhou believes that Chinese companies are taking on more debt than they can pay.

The full amount China’s corporate debt is now 160% larger than its Gross Domestic Product, Bloomberg reported. Zhou also believes that many Chinese companies are now over-leveraged.

Is the Chinese Economy about to Collapse?

It sounds as if many Chinese companies are short of cash and credit. Such reports and speculations will wonder if the Chinese economy is about to collapse or entering a prolonged downturn.

The situation is similar to that in parts of Europe today and reminiscent of the Great Depression in the United States, when companies lacked money to pay their employees. Part of the crisis could be that China’s industrial output and demand for consumer goods now exceeds its money supply.

Another problem might be that industrial production in China is simply outpacing demand. The Chinese simply lack the cash to pay for all the goods that their industry is producing.

A related problem is that China’s banking system is not capable of generating the kind of capital its industry needs to function. Zhou himself seems to share that belief and blames the lack of capital for the debt crisis.

One reason why companies are not paying their bills is that they simply have no way of getting the credit they need. Unfortunately, Zhou did not say how China’s banking system could be reformed to eliminate such risks.

A possible solution would be to allow companies to swap out high-cost debt for something cheaper, such as government bonds. The Chinese government is already giving local governments, some of which are drowning in debt, that option. It is not clear if something like that would work with China’s business sector.

A Prolonged Period of Economic Turmoil

China seems to be on the verge of a period of prolonged economic turmoil created by high levels of debt and overheated industrial growth. The situation is similar to that in the United States in the 2000s, when excessive borrowing and real estate speculation led to a bubble.

The U.S. was able to partially escape this situation when the Federal Reserve lowered interest rates and made a lot of cheap money available. Unfortunately, that might not be possible in China, because the country lacks a modern banking system like the one in the United States.

Expect to see a wave of defaults and business failures in China as its economy contracts. China’s businesses are going to have to learn to live within their means if they want to survive.

Hopefully, the wave of unpaid bills and defaults will not spread to Chinese consumers. If it does, the People’s Republic could be facing a depression and perhaps a period of political upheaval.