All that glitters could come crashing down

The township of Huaxi in the Yangtze River Delta is a proud symbol of how Chinese communists embraced capitalism to lift 300 million people out of poverty during the past three decades.

Its leaders took a farm community with bamboo huts and ox carts in the 1970s and transformed it into an industrial and commercial powerhouse, where today many of its 30,000 residents live in mansions and most have a car. Per-capita income of 80,000 yuan ($16,600) - almost four times the national average - makes Huaxi China's richest village. Huaxi is also emblematic of the country's construction and real estate boom. Communist Party officials there are building one of the world's 30 tallest buildings, a 2.5 billion yuan, 328m tower. The revolving restaurant atop the so-called New Village in the Sky offers sweeping views of paddy fields, fish ponds and orchards.

Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it: "It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity. I think the Chinese economy will decelerate very substantially in 2010 and could even crash."

Huaxi has an even more ambitious project coming up: a 6 billion yuan, 538m skyscraper that would today rank as the world's second tallest. The only loftier building is the Burj Khalifa in Dubai.

Such undertakings figured in warnings hedge fund manager Jim Chanos delivered in January that China is Dubai times a thousand. The costs of wasteful investments in empty offices and shopping malls and in underutilised infrastructure will weigh on China. Chanos, president of New York-based Kynikos Associates, said: "We may find that that's what pops the Chinese bubble sooner rather than later."

China has defied the global recession of the past two years and remained the fastest-growing major economy. Gross domestic product soared 10.7 per cent in the fourth quarter.

The Government gave 4 trillion yuan in stimulus spending and urged banks to lend a record 9.59 trillion yuan last year, to bridge the gap until export demand or domestic consumption rebounds.

Retail sales during the Lunar New Year holiday rose 17.2 per cent from the same period in 2009, according to the Ministry of Commerce. While China's resilience has helped support the world economy, the bursting of a bubble would have the opposite effect. Government efforts to wean the economy off its extraordinary support may roil markets.

In January the Government ordered banks to curb lending, which put China's stock market into reverse. In a sign of how dependent the world has become on China, stocks and currencies slumped in places such as Australia and Brazil that supply commodities to the People's Republic. "If the Chinese economy decelerates or crashes, what you have is a disastrous environment for industrial commodities," said Faber, who oversees US$300 million ($425 million) at Hong Kong-based Marc Faber.

The stimulus tap Beijing turned on has flowed to projects such as its 2 trillion yuan high-speed rail network. The 221 billion yuan Beijing-Shanghai line has surpassed the Three Gorges Dam as the most expensive engineering project in Chinese history.

Some beneficiaries of Government efforts have ploughed their loans into real estate and stocks. Property prices across 70 cities jumped 9.5 per cent in January from a year earlier, according to government data.

Instead of concentrating on their core businesses, giant state-owned enterprises, or SOEs, have bet on real estate, according to Zhang Xin, a former Goldman Sachs analyst who's chief executive officer of Soho China, the biggest property developer in Beijing's central business district.

"All the SOEs are bidding the prices up to the sky," Zhang said in December. That is despite record office vacancies in China's capital, according to commercial real estate company Colliers International.

Chanos, a short-seller who was early to warn about Enron, is one of a growing number of investors sounding the alarm.

Local-government officials have wasted stimulus funds by replacing infrastructure that was fine in the first place. State media complained last May that party chiefs in Jianyang, Sichuan province, decided to help boost the local economy by rebuilding a bridge that had emerged unscathed a year earlier from the earthquake that killed 70,000 people. The so-called Bridge of Strength withstood a demolition crew that tried to blast it to pieces with dynamite, the official China Daily reported.

HIGH AMBITION: Former party secretary Wu Renbao in Huaxi, China's richest village and planned site for two of the world's tallest skyscrapers. Picture / AP Another example Chanos has cited is the city of Ordos, where party officials have built a new downtown on the grasslands of Inner Mongolia, 25km outside the existing municipality of 1.5 million people.

Mark Mobius, meanwhile, is sticking with China. The executive chairman of Templeton Asset Management is encouraged the Government is pulling back some of its extraordinary economic support. "We see the Government's tightening of lending as a positive because it moderates the risk to some degree," says Mobius, who oversees US$34 billion. Chris Ruffle, who helps manage US$19 billion for Edinburgh-based Martin Currie, also remains confident China will avoid a bust. "It's not a highly leveraged situation," says Ruffle, who works in Shanghai. Still, even Mobius says investors have to be wary. He got rid of an investment in a food company after discovering it was using funds to buy apartments instead of to process soybeans.

- BLOOMBERG