China Will Crash

It’s become conventional wisdom that China is the key winner of the global financial crisis. After all, it’s growing 8 percent a year, politically stable, and flush with cash—the Chinese didn’t even feel the credit crunch thanks to a trillion dollars in new bank lending over the last year. But all that easy money has inflated stock and housing markets, leading many high-level investors to worry about a bubble. Indeed, a number of hedge funds have grown bearish on China, and even Chinese officials warn that a fair bit of the country’s new lending and investment has ended up as hot money in the market.

Still, Beijing continues to ramp up production of the steel, cement, and chemicals needed to build huge, government-funded public works and manufacturing projects, even as there is plenty of spare capacity in the system. Green technology has become the latest fad (one third of the $600 billion stimulus program is dedicated to it), but a recent report from the European Union Chamber of Commerce in China cautioned that the Middle Kingdom is making far more wind power than anyone will be willing to buy. The result is that the China stock and real-estate bubble will collapse, leading to a destabilizing bout of global deflation. If this occurs in tandem with a banking crisis, a trade war, or a slowdown in Chinese growth, it could be a pop heard round the world.