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The plunge in developed market bank stocks–the U.S. KBW Bank Index moved into bear market territory today–is bringing intensified attention to the debt bubble in China. The problem isn’t new–some analysts and yours truly have flagged the huge build up in bad debt in China for months–but what has been a somewhat specialized call now looks to move into the mainstream.

And if the markets in general start focusing worry on China’s mountain of bad debt, then I’d expect the pressure on emerging market financial assets to intensify. Today I’ll be adding a position in the ProShares Short MSCI Emerging Markets ETF (EUM) to both my 12-18 month Jubak Picks and my long-term Jubak Picks 50 portfolios to give me some downside protection in what looks to be a continued downward trend in these markets. I don’t intend to hold this short position for ever. Today the ETF is trading at $32.56 at 1:30 New York time, up 1.89% for the day. Year to date the ETF is up 4.3% and it’s ahead 10.1% over the last three months. If the ETF fell to $28 or so due to an unexpected rally in emerging markets, I’d re-evaluate this short position.

Typical of the heightened attention China’s bad debt is getting–and of the heated rhetoric from China bears (which justified or not has a decided downward effect in the current very sensitive market)–is this story today on Bloomberg noting a call from hedge fund manager Kyle Bass that China’s banking system could see 10% of its assets sucked don he bad debt drain as banks are forced to recognize non-performing loans. (In China there is, always, the question of when the government will decide to force banks to recognize non-performing loans that have been non-performing for years. But Bass and other China bears such as James Chanos think the time it near.)  That would dwarf the losses suffered by U.S. banks during the mortgage crisis and lead to about $3.5 trillion in equity vanishing at China’s banks. To recapitalize its banks, the Chinese government would have to print $10 trillion yuan, which would lead to massive 30% devaluation of the yuan versus the dollar. (While devaluation of some dimension would seem likely to me, a devaluation of 30% would go against everything in recent Chinese policy targeted at turning the yuan/renminbi into a global currency.)

Whether you agree with all of Bass’s calculations or not, it’s hard to see how the problem he’s pointing to doesn’t led to turmoil and slower growth in China–and in the emerging economies that sneeze when China catches cold.

And it’s also hard for me to see how China and other developing economies can turn their problems around in the near term. (In the long-term I’d still like to be long these markets. Right now, though, it’s hard to say when the long-term might arrive.)