"I'm a China bear," Mansharamani says. "China is exhibiting all the signs you would expect from an unsustainable boom." He first points to the housing market, where investment hit the inauspicious market of 6% of GDP -- the same mark the U.S. hit in 2006 as the bubble was bursting. What's more, outstanding loans for developers and residential mortgages in China have increased by a factor of FIVE in the last decade. Loan balances have nearly doubled in the last three years alone.
Even worse, Mansharamani says, the Chinese government has spent lavishly to create demand that never materialized. He points to ghost towns like Qungbashi, in Inner Mongolia, a city designed for 1.5 million residents, but drew only 20,000 -- hardly one percent. He points to the New South China Mall, not far from Guangzhou, which was built to handle 1,500 tenants. Instead, it houses a few dozen -- hardly one percent. This sort of one-percent success rate creates ludicrous overcapacity that is eerily reminiscent of the empty homes and strip malls lining recession ghost exurbs in Arizona and Nevada. Mansharamani sees it as the prelude to a dramatic slowdown in government spending on buildings and infrastructure.
AS CHINA GOES, COMMODITIES GO
Well, so what? you ask. What do small towns and empty malls in Nowhere, China, matter to the world economy? The answer is that one engine of the global economy in the last few years has been commodities -- metals like steel and copper and aluminium used to build cities, malls and infrastructure. Countries with commodities, like Brazil and Australia, have thrived. So have US companies that specialize in unearthing commodities, like Bucyrus and Caterpillar.
But as China goes, commodities go. China's share of world demand for leading metals like aluminium, copper, zinc, lead, nickel, and crude steel is about 40 percent, according to research obtained from Goldman Sachs. For steel, China commands nearly half the global market. (In 2000, its share of global demand for those metals was between 6 and 16%.)
Even these numbers understate the breadth of China's impact. "Think how much steel is sold to Caterpillar or John Deere for capital goods that are sent to China," Mansharamani says. "Or how much is sent to Brazil to mine iron for China. Think of the countries that get dragged down with a commodities slow-down -- South Africa, Brazil, Peru. The world shipping sector."
If China slows down even to 5% growth a year, that will take a booming commodities market down with it.
THE NEXT FEW MONTHS
In the short term, Mansharamani told me in a follow-up interview, the commodities story could hold together longer thanks to new demand out of Japan to rebuild after the quake and tsunami. If a spending binge in Japan increases real demand for metals, it could justify ongoing speculation in metals prices.
But like a balloon batted in the air one last time, this might serve to only make the fall more dramatic, Mansharamani says. "This will temporarily hide the unsustainability of the Chinese investment boom," he wrote to me in an email. "It will embolden mining companies to expand more rapidly. This will likely make the eventual correction more extreme than if the excesses were revealed today."