Yao says the answer to where the money is going is a growing "debt snowball" which doesn't contribute to economic activity. The result is both companies and the public sector face burgeoning interest expenses.

This fits with the theory first put forward by economist Hyman Minsky of Washington University in St. Louis. His financial instability hypothesis showed how markets create waves of credit expansion and asset inflation, followed by periods of contraction and deflation.

Using methodology from the Bank for International Settlements, Yao estimated a debt burden of non-financial companies and local government financing vehicles of about 150 percent of GDP at the end of 2012. Assuming an average interest rate of 6.3 percent, Yao estimates a "shockingly high" debt service ratio of 338.6 percent of GDP.

Similar ratios were evident in countries as they neared financial and economic crises, including the U.S. and the U.K. in 2009, South Korea in 1997 and Finland in the early 1990s.

"The logical conclusion has to be that a non-negligible share of the corporate sector is not able to repay either principal or interest, which qualifies as Ponzi financing in a Minsky framework," said Yao. "This is one more data point in China that evokes the troubling thought of a hard landing."