Beijing could steer China toward a “soft landing.” So far, it’s managed to avoid a big bust

Over the last 30 years, this country’s economy has increased sixteen-fold.

And its standard of living has doubled every 10 years.

If this country keeps growing at its current rate, it will account for 40% of the entire planet’s economic output within a decade.

The country I’m talking about is China.

It used to be that investors worried about whether China could “decouple” from the U.S. economy. Now it’s the other way around.

Rumors that Beijing is about to raise interest rates has lead to a big sell-off in not just Chinese…but global stocks.

It’s no wonder that one question that’s forefront on investors’ minds is whether China is in a speculative bubble or not.

Some smart investors say it is. And they say it’s only a matter of time before this bubble bursts.

These include legendary short seller Jim Chanos (who made a fortune shorting Enron)…Gloom, Boom & Doom publisher Marc Faber…and Harvard University professor and expert in financial meltdowns and their aftermaths Ken Rogoff.

It’s too early to tell for sure if China is in a bubble. One thing’s for sure: China is exhibiting some of the shared characteristics of previous speculative bubbles and manias.

What follows are 10 “tell tale” signs of speculative bubbles everywhere, courtesy of fund manager GMO’s Edward Chancellor.

Is China in a Bubble? You Decide…

1) Great investment manias usually start with a compelling growth story – Think railroads and canals in the nineteenth century and the Internet in the twentieth century. For China, it’s the blistering pace of economic growth backed by the huge surge in its population.

2) A blind faith in the competence of the authorities – During the Internet boom of the late 1990s it was a belief that Alan Greenspan had tamed the business cycle. In China, it’s the belief that the Communist Party has the situation “under control” and that eventually China will be the world’s preeminent power.

3) A general increase in investment – In the 1840s railroad mania, three separate railway lines were built between London and Peterborough. In China, the government is building “ghost cities” – hypermodern cities with no inhabitants. (You can see one of them in this video.)

4) A rise in corruption – We saw this in the recent credit boom in the U.S. Few asked questions while the money was flowing. When the crunch came, the fraudsters were caught out. The People’s Republic recently slipped to 79th place in Transparency International’s 2009 Corruption Perceptions Index – just below Burkina Faso.

5) Easy money – This lies behind all great manias. Case in point was the recent credit bubble in the U.S., fueled by the Fed’s super low interest rates. Last year, money supply in China rose by 30%. That’s a steep rise. And its effects are being felt in rising asset prices – from food to collectibles to shares in Chinese companies.

6) Fixed currency regimes – The fixed euro regime across the 16-member E.U. helped fuel the property bubbles in Ireland and Spain. An artificially low Chinese yuan has been key to China’s export-led growth.

7) Rampant credit growth – Again, this is familiar from the recent credit boom in America that helped fuel the housing bubble property prices. In China last year lending increased by a sum equivalent to 29% of total economic output. Most of this lending has gone into real estate and infrastructure projects.

8) Moral hazard – This was the case with America’s “too big to fail” financial institutions. The major Chinese banks are state controlled. As such, the market deems them also “too big to fail.”

9) Financial structure become precarious – Misallocated investments financed with borrowed money don’t generate enough returns to service the loan. Many of China’s infrastructure projects fit this category. They throw off no cash flow.

10) Rapidly rising property prices – As anyone in Ireland will tell you, easy credit often leads to big rises in property prices. Over the course of the last decade Chinese home prices have risen about 8% a year. This has led many to believe that home prices can only travel in one direction – much like investors in Florida’s housing market believed in the run up to the sub-prime bust.

Like I say, Beijing could steer China toward a “soft landing.” So far, it’s managed to avoid a big bust.

But history would suggest that this can be a difficult task…