China's Economy Boom the Next Big Bubble Ready to Burst | Economic Speculation in China

It was just reported that China expects their GDP to grow by 10.2% in 2010. China has been providing economic growth figures like that for a very long time. Although many people feel that China's economy has been obviously growing for the last 20 years, 10% GDP growth every year seems unbelievable. Those who know the political nature of China also know that it is a Central Government run by a single party, the communist party, which is very pragmatic and utilitarian. What does that mean? It means that the ends justify the means.

That means that they may be inflating their GDP growth to attract foreign investment. They can do this because they are a totalitarian regime that can manipulate their economic numbers however they want. Even democratic governments do this to a certain extent. And these glamorous reports of rapid economic growth is working. Investors are looking at China as the next big thing, and they may get burned by their naivete and ignorance. Many experts now feel that there is a growing economic bubble looming in China that may burst at any moment.

Jim Chanos, who is a billionaire investor who manages a very large hedge fund, believes that there is an economic bubble currently in China. His fund is shorting China in their investment strategy. What does that mean? That means his current strategy is to profit from the decline of investments, securities and stock related to China. There is a real estate bubble in China like there was in the US, fueled by foreign investors and stimulus money from the Chinese government and Jim Chanos is positioning himself to profit from it's pop.

China will also be introducing sophisticated financial products like stock index futures, short selling and trading on margin, the complex set of supposedly risk-management products that assists the decline of the US economy. They are doing this to gain credibility as a world financial power, but may instigate and enable a rapid decline instead.

Another factor that still looms is the dollar yuan currency exchange rate. China has pegged the Chinese yuan at their specified value against the dollar keeping the yuan really cheap. Why are they doing this? It's to encourage businesses to invest in China. The deflated value of the yuan makes investing in China really cheap. But as their economy has grown, most foreign currency experts say that the yuan should be valued a lot more than it is. Because the yuan's value doesn't float based on the principles of supply and demand like most other currencies, we don't really know the true value of the yuan. This has hurt the world economy, especially the US because it has driven investors out of the US and into China as we have seen over the last 2 decades.

Many also think that there is a huge bubble in the real estate market in China.  Once the bubble pops, people will want to sell property fast and the prices will tank.  Many sellers may be left with little or no buyers like what we saw in the US.

So how should an investor respond to this? I am not an investment adviser or financial planner, but in my opinion, I would take money out of companies that are heavily invested into China. I would also resist the urge to invest in companies, even ones who are going up in value, if they have a ton of stake in China until China's economic growth is verified.