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The man who made a fortune after he predicted the collapse of Enron, reckons that China is in for a nasty fall.

And yet data out yesterday does appear to blow one almighty hole in the Chinese bubble theory.

If you sign up to the idea that the real cause of the economic crisis of our times is global imbalances, then at first glance Sunday’s data would appear to represent the strongest evidence yet that we are seeing a fix. So if true, that really would be good news, very good news.

It’s just that when you take a closer look, the bubble theory comes back to life. But, then again, maybe the Great Chinese bubble isn’t such bad news after all.

James S Chanos is a rich man. He is one of the top investors in America. He built his fortune initially by correctly predicting the fall of Enron. And now he has turned his prescience on China. He is not exactly predicting a fall for the world’s number two economy on a par with the fall of Enron, but he is saying China is in for a very nasty shock.

The big snag he says, is that too much money is going into investment. In China, credit markets are brimming over with cash. The Chinese property market, reckons the guru is “Dubai times 1,000 — or worse.”

So while Dubai has been building a latter day Tower of Babel, and a man made archipelago of islands that look like a map of the world, it seems Chinese excess is even more extreme.

He told CNBC “Bubbles are best identified by credit excesses, not valuation excesses…And there’s no bigger credit excess than in China.”

His theory is not new. This column has remarked upon the phenomenon of roads in China that appear to go nowhere. The truth is, China has to put its enormous savings somewhere.

It is probably impossible for an economy to grow at the extraordinary rate seen in China without problems occurring. Imbalances are no doubt inevitable. So does this mean China has got a nasty surprise coming its way? Strangely enough, at face value, the latest data on China’s balance of payments would appear to say no.

China’s imports jumped by no less than 55.9 per cent in December, over the year before. Exports were up too, but by nowhere near as much, surging by 17.7 per cent.

In fact, while the rise in China’s exports were altogether more modest than the jump in imports, they were still enough to lift China from being the world’s number two exporter, to number one, leaving Germany in its wake.

But that is surely good, you could be forgiven for saying. If Global imbalances are the real cause of today’s hard times, then the fact China’s imports are rising faster than exports must mean the trade gap between the rest of the world and China is closing.

It is just that closer examination of the figures tells a different story, and if anything supports the bubble theory. Much of the increase in imports was for goods and raw materials used in re-processing. So it seems the goods being imported now will be assembled into complete products ready for consumption and re-exported.

The rise in imports then, may simply be down to Chinese manufacturers preparing for an even bigger export drive.

So how much damage could the bursting of the Chinese bubble do?

Now the picture becomes murky. In the short term the bursting of the Chinese bubble could be most unpleasant. Back in December, it was estimated that the average Chinese worker would produce around $4,000 worth of goods and services in 2010, compared to just $3,500 in 2009. In other words, productivity is rising at an extraordinary rate.

Normally, improvements in productivity are seen as good news, but for China the real challenge is finding a market for the extra goods and services it produces. The west is satiated. The debt stricken westerners just can’t afford to absorb all these extra goods and services. And while consumer demand in China is rising, it is just not realistic to expect internal demand to keep pace with the extraordinary rise in capacity.

The danger is that, therefore, mass unemployment will result. The Chinese government is terrified of the social unrest this will bring. The great investment bubble, then, is the result of government policy with surging unemployment the only alternative.

But in the very long run, the investment boom may be no bad thing.

And by the way, the same argument can be made for Dubai. In the case of the little land in the Middle East, the property bubble may have led to a viscous debt crisis, but it has also produced an infrastructure that has transformed a bit of desert with few natural resources into a Mecca for tourism. The money that will flow into Dubai over the course of this century will ensure great riches, even if the riches don’t necessarily go to the men and women who got the ball rolling.

The same is true in China. Years after the bubbles bursts, the capital infrastructure that was created will serve the country for decades.

Although they wouldn’t put it in these terms, this is in effect what Chinese authorities mean when they say we are mistakenly applying western values to Chinese practice. In the west we focus on the short term, in China, the approach is more long term. And the long term result of the investment bubble will be a richer country.

Bubbles and like that. Daniel Gross, author of the book “Pop! Why bubbles are great for the economy,” argues that the US economy has thrived in part because of bubbles exaggerating the potential for exciting new technology, then crashing and creating cheap capacity. For example, Google was able to buy a network of servers big enough to feed the US market, on the cheap. Or, further back in time, Dun Bradstreet was able to benefit from a bubble in the creation of a US-wide network in telegraph wires; this market crashed, but the end result was low cost communication. Later that century business benefited when an over supply of railroads led to cheap transport, and trade across the states then boomed.

See also:
China and the West: the lesson of history

Google China row: Why this really does matter

Now China is number one for car sales

The Great Bubble of China

China gets slammed over software piracy