Is China the next Dubai

To question China's relentless and inevitable rise to the top of the world's economic pyramid today is to invite ridicule. Investors like Jim Rogers have long thought that China is the only worthy investment story on Planet Earth. Anthony Bolton, the United Kingdom's answer to Peter Lynch, recently threw his hat in the ring, emerging from retirement and moving to Hong Kong to start a China fund. Other China bulls have predicted that the Chinese stock market could overtake the United States in terms of market capitalization within three years.

This is heady stuff for a country that didn't even merit its own chapter in the World Bank's "The East Asian Miracle: Economic Growth and Public Policy," published only 15 years ago. Back then, it was all about Japan and the Asian Tigers -- Taiwan, Singapore, Hong Kong, and South Korea. Even today, China is a story of remarkable contrasts. Yes, it boasts currency reserves of $2.3 trillion, making it, by that measure, the richest country in the world. But China also is a country where 200 million people live on less than $5 a day. Understanding that China's rise won't happen without some serious bumps along the road is the key to making -- and keeping -- money from the "China Miracle." Is China the Next Dubai: Lessons from the Tiny Emirate Superficially, Dubai's rapid development from speck of dust in the desert to mirage made real is not that different from China. Cheap financing combined with world-class aspirations fueled Dubai's property boom that included the world's tallest building, the Burj Dubai. Dubai property prices doubled between 2005 and 2008, as commercial and residential real estate in the middle of the endless desert became as expensive as cramped quarters in New York and London. The emirate's rulers even targeted a China-beating annual GDP growth of 11% to 2015. Eighteen months later, the vacancy rate for Dubai office buildings is 40%, even as planned new construction is set to double the city's office space over the next two years. China bulls will dismiss uncomfortable comparisons with Dubai with a knowing chortle. After all, the population of China is a thousand times greater than the tiny emirate's. And Dubai's $50 billion GDP is less than the economic wealth that China has generated in the last three months. Yet, perhaps this is precisely the reason you should pay attention to the rising din of China critics. Even as the media falls all over itself to praise the remarkable efficacy of China's $585 billion stimulus package, "Bond King" Bill Gross of PIMCO made investors squirm when he observed that the all-knowing economic philosopher kings running the Chinese economic show may inflate... gasp!... a bubble of their own.

Is China the Next Dubai: The Sin of Over-investment? Much like little bubble brother Dubai, the problem in China is best summed up in a single word: "over-investment." Even as U.S. and global consumers are closing their wallets , China is building more steel, more factories, and more malls for which there is almost no demand. Much like in Dubai, many Chinese skyscrapers stand empty, even as whole new cities are being built where the vacancy rates are as high as 75%.

One blogger described one of Beijing's leading malls, "The Place," as "stunningly dysfunctional, catastrophic... with fifty percent of the eateries in the basement boarded up. There is simply too much stuff, too many stores and no buyers." Perhaps no project better illustrates China's dilemma than the spectacular, $450 million Bird's Nest Olympic stadium, designed to last for 100 years and withstand a magnitude-8 earthquake. Yet, the stadium now stands empty, with paint peeling ignominiously from its slick girders. "You build it and they will come" is a better Hollywood movie plot, than a sustainable development strategy. Scratch the surface behind China's impressive growth numbers, and they tell an unsettling story. Consider that 19 out of 20 dollars of China's GDP growth this year is from investment in fixed assets -- empty malls, ghost cities, and tens of thousands of bridges that lead to nowhere. China is investing at a pace like no other country in history.

Post-war Germany achieved a peak investment to GDP ratio of 27% in 1964; Japan's peaked at 36% in 1973, and South Korea's at 39% in 1991. The comparable number in China today is 50%-plus. Yet, not only are the Chinese building a lot of stuff they don't need, they also are getting a heck of a lot less bang for their buck. From 2000 to 2008, it required $1.5 in debt to produce $1 of GDP in China. Today, it takes $7 of credit to yield $1 of growth in GDP. No one has done that poorly since, well, the bad old days of the Soviet Union. Is China the Next Dubai: Enron Revisited? The knives are coming out to make money on China's collapse. Jim Chanos, founder of the investment firm Kynikos Associates and iconic short seller, has put the Chinese market in his sights. Chanos made his reputation -- and a good chunk of his fortune -- as one of the first Wall Street analysts to see that Enron's earnings were pure fiction. Chanos believes that much like Enron, inconsistencies in China's statistics -- like the surging numbers for car sales but flat statistics for gasoline consumption -- confirm that the Chinese are simply cooking their books. The Chinese even have a phrase for ripping off foreigners: "Neng pian, jiu pian" -- "If you can trick them, then trick them."

The bad news is that, if Chanos is right, the collapse of the Chinese economy will be 100 times worse for the global economy than the brief hiccup that was Dubai. If China's economy stops running hard, it will have profound effects on its ability to finance the exploding U.S. deficit. In Chanos' view, the slowdown in China may be as big of a watershed event for world markets as the subprime collapse was in the United States. Little wonder that he is betting the farm on shorting China's economy. For students of financial history, the coming collapse of China is as painfully obvious today as it will be to others with the benefit of 20/20 hindsight. That doesn't mean that China won't eventually emerge as a global economic power. After all, the rise of the United States from a tiny country of 2.2 million people in 1800 to the world's leading power a century later was punctuated by at least half a dozen financial manias followed by depressions.

But as the British economist John Maynard Keynes observed, "in the long run, we're all dead." If you have a shorter time horizon, batten down your investment hatches. The investment seas may get rough.