“Analyzing the Chinese economy while it is growing at superfast rates is like analyzing a bank during an economic expansion – all you see is reward.” – Vitaliy Katsenelson, “China, the Mother of All Black Swans”

Mar. 4 – China’s booming economy, practically unhindered by the largest economic slowdown since World War II, has led the country to be viewed both as a threat (to jobs, to the global economy, to regional stability) and a savior (to jobs, to the global economy, to regional stability) depending on the country, politics and point of view of the pundit. Increasingly, many are beginning to view China’s growth not as an economic miracle, but as clear danger signs of economic overheating, a debt-fueled bubble in danger of collapse.

Former chief economist for the International Monetary Fund and current Harvard professor Kenneth Rogoff is warning of a collapse in China within 10 years. People say that China “won’t have a financial crisis because there’s central planning, because there’s a high savings rate, because there’s a large pool of labor,” Rogoff said at a conference in Tokyo two weeks ago. “I say, of course China will have a financial crisis one day.”

To put it more bluntly, Vitaliy Katsenelson, the director of research at Investment Management Associates, compares China to the bus in the Keanu Reeves movie Speed. “If the economy slows down below a certain level…” Katsenelson writes, saying that if and when the economy slows, China will be the mother of all black swans.

Victor Shih asserts that the Chinese government financed much of the country’s RMB4 trillion stimulus plan through thousands of investment entities created by local governments. Writing in the Wall Street Journal, the Northwestern University professor says that if Beijing doesn’t recognize and stop this practice, “banks in China, which have provided the bulk of the funding, may soon face delinquent loans that rival China’s enormous fiscal and foreign-exchange capacity.”

“I estimate local investment entities’’ borrowing between 2004 and the end of 2009 totals some US$1.6 trillion.” Shih’s evidence suggests that the scale of the problem is much larger than previously thought. “At US$1.6 trillion, the local debt is roughly one-third of China’s 2009 GDP and 70 percent of its foreign-exchange reserves.”

“We have completely lost perspective on what constitutes reality in China today,” Elizabeth Economy, the director for Asia studies at the Council on Foreign Relations, was quoted as saying in a recent Washington Post article on China’s perceived strengths. “There is a lot that is incredible about China’s economic story, there is as much that is not working well on both the political and economic fronts.

China’s economic stimulus plan generated more than 85 percent of the country’s overall economic growth in 2009. This stimulus spending led to growth, but also spurred speculation and increased the possibility of asset bubbles said Stephen Roach, chairman of Morgan Stanley Asia at the Asian Financial Forum in Hong Kong on January 20.

The government also hasn’t done enough to encourage consumerism says Chen Xingdong, chief China economist at BNP Paribas in Beijing in the February issue of FinanceAsia. China has let rural residents buy refrigerators at a bargain price, but hasn’t ensured a stable power supply to the areas where they live.

Asset bubbles are not the only looming crisis that China has before it. By 2050, the number of people over the age of 60 is expected to reach 438 million, or one out of every four, compared to one out of every 10 in 1980. What this will mean is that 1.6 working age adults will support every person aged 60 and above, compared to 7.7 in 1975.

The consequences of these crises are many Katsenelson argues. China will turn into an anchor for the global economy should the Chinese bubble burst. Commodity markets will tank he says as incremental demand from China sends oil prices into a tailspin, taking the Russia and the Middle Eastern oil economies with it. Demand for industrial goods will also fall (China currently consumes US$550 billion in consumer goods annually). And as the Chinese stop buying up U.S. treasuries, the dollar will fall lower against the RMB, raising U.S. interest rates.

Strong actions are needed to forestall disaster Shih says. “First, the government needs to order banks to stop lending to all new or newly started investment projects undertaken by local entities…Second, since county governments are in the poorest fiscal shape and have the least ability to repay banks, the central government should take over the debt of almost all of the county-level investment vehicles.”

With both China and the United States carrying so much debt, a failure of either system would substantially cripple a global system still pulling itself out of the Global Financial Crisis. What happens over the next 10 months could well determine whether China and its breakneck growth are threat or a savior.